Fed, BOJ Hikes Lift Dollar as Oil Falls (21 – 25 September)

Global markets entered the week balancing tighter monetary policy against signs of easing Middle East energy risks. The Federal Reserve remains the main macro driver after raising rates to 3.75%–4.00%, its first hike since 2023, and signaling that another increase remains possible this year. The Dollar Index advanced to 100.4, while Treasury yields remained elevated. The Bank of Japan also tightened policy, raising rates to 1.25%, although dissent within the board suggested that future increases could come at a slower pace.

Oil prices have become a key transmission channel for inflation expectations. Brent fell toward $104 as fears surrounding Saudi supply disruptions eased, helping gold and silver recover despite a stronger dollar. In Europe, markets continue to price further ECB tightening, although concerns remain that elevated energy costs could weaken growth. The Bank of England kept rates unchanged at 3.75% but warned that persistent Middle East risks could require additional action.

Market Drivers & Catalysts

• Fed Raises Rates: The Fed unanimously increased rates by 25 basis points to 3.75%–4.00%, its first hike since 2023, with most officials expecting at least one additional increase this year.
• BOJ Tightens Policy: The Bank of Japan raised rates by 25 basis points to 1.25%, the highest since 1995, although two policymakers opposed the decision.
• Oil Supply Fears Ease: Brent fell toward $104 as Saudi crude flows through Hormuz increased to 2.8 million barrels per day from 700,000 in August and expectations grew that part of the East-West pipeline could return to operation.
• BoE Holds Rates: The Bank of England voted 6-3 to maintain Bank Rate at 3.75%, with three policymakers supporting a 25-basis-point hike.
• ECB Expectations Remain Elevated: Markets see the ECB deposit rate reaching around 2.9% by December, although higher energy costs could weigh on economic growth and inflation.

Fixed Income

• US 10-Year Treasury Note Yield: The US 10-year Treasury yield rose 7 basis points to 5%, reversing an earlier 8-basis-point decline as markets digested the Fed's more hawkish stance. The yield had previously reached 5.04%, its highest since 2007, amid concerns over inflation and energy prices. The Fed's 25-basis-point increase and signals of another potential hike this year kept upward pressure on yields.
• UK 10-Year Bond Yield: The UK 10-year gilt yield climbed to around 5.3%, rebounding after a 10-basis-point decline as investors assessed stronger retail sales and the Bank of England decision. August retail sales increased 0.5%, beating expectations for a 0.2% decline. The BoE maintained rates at 3.75% and halted long-dated gilt sales while highlighting inflation risks linked to the Middle East.
• Japan 10-Year Government Bond Yield: Japan's 10-year government bond yield eased toward 2.95%, extending declines for a third session despite the BOJ's 25-basis-point hike to 1.25%. Markets are now looking for guidance on the pace of future tightening as wage growth, inflation, and external pressure for higher rates remain in focus. Core inflation eased to 1.7% in August, reducing some immediate pressure on the central bank.
• Germany 10-Year Bund Yield: Germany's 10-year Bund yield settled near 3.5% after reaching 3.57%, its highest since June 2009. The Fed's hawkish policy outlook reinforced global tightening expectations, although some analysts consider current ECB hike expectations excessive due to the potential impact of higher energy prices on European growth.

Commodities

Gold climbed to around $4,380 per ounce, reaching a one-week high and heading for its first weekly gain in four weeks. Falling oil prices eased some inflation concerns, although the stronger dollar and tighter Fed policy limited the recovery. Markets currently see around a 60% probability of another Fed hike next month.

Silver climbed toward $66 per ounce, its strongest level in more than a week, as falling oil prices reduced inflation concerns. Gains remained limited by a stronger dollar following the Fed's rate increase, with markets pricing a 60% probability of another hike next month.

Currencies

• U.S. Dollar Index (DXY): The Dollar Index advanced to 100.4, reaching a six-week high after the Fed raised rates by 25 basis points to 3.75%–4.00%. Policymakers indicated that another increase could follow later this year, while Chair Kevin Warsh maintained his focus on controlling inflation. Continued yen weakness also supported the dollar.
• Euro: The euro declined toward $1.15, its lowest level since late July, and lost around 1% over the week. The Fed's hawkish outlook strengthened the dollar, while markets continued to assess the ECB's own tightening path. The ECB deposit rate is currently expected to approach 2.9% by December, although energy-related growth risks could limit further increases.
• British Pound: Sterling traded near $1.335, its weakest level since late July. UK retail sales provided some support after rising 0.5% in August, compared with expectations for a 0.2% decline. However, the BoE's decision to leave rates unchanged and broad dollar strength kept the pound under pressure.
• Japanese Yen: The yen weakened toward 157 per dollar, reaching a two-week low despite the BOJ raising rates by 25 basis points to 1.25%, the highest level since April 1995. Two policymakers opposed the increase, contributing to expectations that future tightening will proceed gradually. Core inflation also eased to 1.7%, while the Fed's more hawkish stance maintained a wide policy gap between the two countries.

Economic Data Highlights

• Federal Reserve Interest Rate: The Fed unanimously raised rates by 25 basis points to 3.75%–4.00%, its first increase since 2023. Most policymakers expect at least one additional hike this year, while four anticipate two. GDP forecasts for 2026 and 2027 were revised slightly higher, PCE and core inflation projections were increased, and unemployment forecasts were lowered to 4.1% for both years.
• Bank of England Interest Rate: The MPC voted 6-3 to keep Bank Rate at 3.75%, with three members supporting an increase to 4%. UK CPI reached 3.1% in August, with higher energy prices linked to Middle East tensions expected to add further pressure. The BoE also agreed to reduce its gilt holdings by £46 billion annually through 2034.
• Japan Inflation: Annual inflation remained at 1.9% in August, while core inflation eased to 1.7%, its first slowdown in four months and seventh consecutive month below the BOJ's 2% target. Monthly inflation slowed sharply to 0.1% from a revised 0.5% in July.
• China Industrial Production: Industrial output increased 5.2% year-on-year in August, accelerating from 4.5% and beating expectations. Manufacturing grew 6.1%, with computers and communications equipment rising 17.2% and railway and shipbuilding output increasing 13.4%. Output increased 5.3% during the first eight months of the year.

Macro Calendar Highlights

• Tuesday, September 22: US Existing Home Sales and Richmond Fed Manufacturing Index.
• Wednesday, September 23: Eurozone Manufacturing and Services PMIs, UK Manufacturing and Services PMIs, and US S&P Global PMIs.
• Thursday, September 24: US Durable Goods Orders, Initial Jobless Claims, and New Home Sales.
• Friday, September 25: US PCE Price Index, Core PCE Price Index, Personal Income, Personal Spending, and University of Michigan Consumer Sentiment.