Dollar Keeps Firm Ahead of US Inflation (12 – 16 October)

The dollar held firm heading into the new week as investors awaited key US inflation figures to guide Federal Reserve policy. The Dollar Index held above 102 after four consecutive weekly gains, while the euro and yen remained under pressure from wide interest rate differentials and persistent fiscal concerns. September’s consumer and producer inflation reports will be closely watched as markets assess whether the Fed has room to pause its tightening cycle.

Energy markets provided some relief from inflation concerns after Brent crude retreated toward $103 per barrel. President Donald Trump announced an agreement for Russia to supply hundreds of thousands of tons of diesel, while productive US-Iran negotiations reduced fears of further military escalation before the November midterm elections. Lower oil prices supported precious metals and helped stabilize global bond markets, although long-term yields remained elevated.

Market Drivers & Catalysts

• US Inflation in Focus: September CPI is expected to rise 0.6% monthly and 3.6% annually, compared with 0.4% and 3.4% in August. Core monthly inflation is forecast to ease to 0.2%.
• Dollar Maintains Momentum: The Dollar Index remained above 102, following four consecutive weekly gains as investors awaited the Fed’s next policy signals.
• Russian Diesel Supply Agreement: Washington announced an agreement for Russia to supply hundreds of thousands of tons of diesel, potentially easing global fuel shortages.
• Middle East Tensions Ease: Trump ruled out military action against Iran before the November midterm elections, citing progress in negotiations.
• European Growth Concerns: French fiscal instability continued to pressure the euro, while UK economic activity is expected to contract in August.
• Eurozone Inflation Remains Elevated: Annual inflation is forecast to hold at 3.8%, maintaining pressure on the ECB to keep monetary policy restrictive.

Fixed Income

• US 10-Year Treasury Note Yield: The US 10-year Treasury yield held around 5.24% on October 9, following a sustained increase in long-term borrowing costs. The benchmark yield has risen 27 basis points over the past month and stands approximately 120 basis points above its level a year earlier. Investors now await September inflation data to assess the outlook for further Federal Reserve tightening.
• UK 10-Year Bond Yield: UK 10-year gilt yields remained above 5.4%, close to a 19-year high, as investors balanced falling oil prices against hawkish comments from Bank of England policymakers. Brent’s retreat helped ease some energy-driven inflation concerns after Trump ruled out an attack on Iran before the November midterm elections. However, expectations for further BoE tightening continued to support elevated yields.
• Japan 10-Year Government Bond Yield: Japan’s 10-year government bond yield declined toward 3%, reaching a two-week low as Japanese bonds followed falling US Treasury yields. Strong demand at the latest US 30-year Treasury auction helped support global bond markets. Domestically, Japanese personal spending declined for a ninth consecutive month in August, reflecting continued pressure on household demand from inflation.
• Germany 10-Year Bund Yield: Germany’s 10-year Bund yield eased toward 3.45%, moving further below the 17-year high reached in late September. Falling oil prices and safe-haven demand supported German bonds as concerns surrounding Middle Eastern oil supplies moderated. Progress in US-Iran negotiations and Washington’s decision to avoid military action before the November elections also contributed to lower yields.

Commodities

Gold climbed above $4,200 per ounce, extending gains for a third consecutive session as falling oil prices eased inflation concerns. The recovery followed Trump’s announcement of an agreement for Russia to supply hundreds of thousands of tons of diesel, potentially reducing global fuel shortages. Lower energy costs helped improve expectations for inflation and monetary policy.

Silver advanced above $61 per ounce, extending gains from the previous session as lower oil prices helped ease inflation concerns. Expectations that Russian diesel supplies could reduce global fuel shortages supported sentiment toward precious metals, while investors remained focused on upcoming US inflation reports.

Currencies

• U.S. Dollar Index (DXY): The Dollar Index held above 102 after four consecutive weeks of gains. Investors remained cautious ahead of September’s US CPI and PPI reports, scheduled for Wednesday and Thursday, respectively. The releases are expected to provide further guidance on the Fed’s next interest rate decision.
• Euro: The euro recovered above $1.12 after touching a 17-month low of 1.1161. Stabilizing French bond markets, easing energy prices, and lower US Treasury yields supported the rebound. However, the currency remained on course for a fifth consecutive weekly decline, with cumulative losses of approximately 3% against the dollar, as France’s record-high debt and budget difficulties continued to weigh on sentiment.
• British Pound: Sterling rebounded toward $1.324, recovering from three-month lows as lower oil prices and more stable global bond markets improved risk appetite. Hawkish remarks from BoE policymakers also provided support. Brent’s decline followed Trump’s announcement that Washington would avoid military action against Iran before the November midterm elections.
• Japanese Yen: The yen weakened beyond 158 per dollar, heading for a fourth consecutive weekly decline. Wide interest rate differentials between the US and Japan continued to pressure the currency, while relatively low domestic interest rates and Japan’s substantial public debt burden remained additional concerns.

Economic Data Highlights

• US Consumer Price Index (September Forecast): Headline inflation is expected to increase 0.6% month-on-month, accelerating from 0.4% in August. Annual CPI is forecast to reach 3.6% from 3.4%, while core monthly inflation is expected to ease to 0.2% from 0.3%. The report will be a major factor in determining expectations for the Fed’s next move.
• UK GDP (August Forecast): The UK economy is expected to contract 0.1% month-on-month, reversing July’s 0.4% expansion. A negative reading could raise concerns about economic momentum heading into the fourth quarter and complicate the Bank of England’s policy outlook.
• US Retail Sales (September Forecast): Headline retail sales are expected to increase 0.3% monthly, slowing from 1.2% in August. Core retail sales are forecast to rise 0.5%, compared with 1.4% previously. The Philadelphia Fed Manufacturing Index is also expected to decline to 26.5 from 37.8, suggesting softer economic activity.
• Eurozone Inflation (September Forecast): Annual inflation is expected to remain at 3.8%, well above the ECB’s 2% target. Germany’s inflation rate has already accelerated to 3.3%, its highest since December 2023, while energy inflation reached 14.9%.

Macro Calendar Highlights

• Wednesday, October 14: US Consumer Price Index (CPI) and Core CPI.
• Thursday, October 15: US Producer Price Index (PPI), Core PPI, Retail Sales, Initial Jobless Claims, and Philadelphia Fed Manufacturing Index; UK GDP.
• Friday, October 16: Eurozone Consumer Price Index (Final) and Core CPI.