Fed Hike Bets and Hormuz Tensions Lift Markets (28 September – 2 October)

The week started with renewed pressure from rising oil prices and expectations for further monetary tightening. The Dollar Index climbed toward 101.1, near a two-month high, as several Federal Reserve officials cited resilient economic growth, a strong labor market, and persistent inflation risks as reasons to hike rates further. Markets now price in roughly a 66% chance of another Fed hike in October, while the US 10-year Treasury yield has climbed to its highest level since 2007.

Middle East tensions remain a major source of inflation risk after President Donald Trump rejected Iran’s latest proposal for reopening the Strait of Hormuz. Tehran said it would not soften its conditions, while further regional attacks kept energy markets on edge. Brent crude moved back above $106, weighing on gold and silver as higher energy costs reinforced expectations for tighter monetary policy. Investors now turn to US inflation and labor market data for further guidance on the Fed’s next move.

Market Drivers & Catalysts

• Fed Hike Bets Rise: Markets price in roughly a 66% probability of another Fed rate increase in October, supported by resilient economic data and hawkish comments from policymakers.
• Hormuz Talks Stall: President Trump rejected Iran’s latest proposal to reopen the Strait of Hormuz, while Tehran maintained its conditions for restoring shipping through the waterway.
• Oil Rebounds: Brent crude climbed above $106 per barrel as uncertainty over Hormuz and further regional attacks renewed supply concerns.
• BoE Expectations Strengthen: Markets see roughly an 80% probability of a November BoE hike, with slightly more than four 25-basis-point increases priced over the next year.
• BOJ Tightening Remains in Focus: A former BOJ official suggested the central bank could raise rates for a second consecutive month in October as energy-driven inflation risks increase.

Fixed Income

• US 10-Year Treasury Note Yield: The US 10-year Treasury yield climbed toward 5.2%, its highest level since July 2007. Stronger business investment data and rising University of Michigan inflation expectations reinforced the case for further Fed tightening. Markets now price in around a 66% probability of an October hike, while Treasury Secretary Scott Bessent’s expanded bond buyback programme has so far had limited success in containing longer-term yields.
• UK 10-Year Bond Yield: The UK 10-year gilt yield rose to around 5.4%, approaching a two-decade high. BoE Governor Andrew Bailey warned that persistently elevated energy prices could make it harder to keep rates unchanged, while MPC members Sarah Breeden and Clare Lombardelli moved closer to supporting another increase. Markets currently assign roughly an 80% probability to a November hike.
• Japan 10-Year Government Bond Yield: Japan’s 10-year government bond yield climbed toward 3.1%, its highest level since 1996. Rising energy prices strengthened expectations that the BOJ may accelerate its tightening cycle, while minutes from the July meeting showed policymakers emphasizing the need for preemptive action against upside inflation risks.
• Germany 10-Year Bund Yield: Germany’s 10-year Bund yield remained around 3.5% after recently reaching 3.57%, its highest since June 2009. Expectations for tighter global monetary policy continued to support yields, although concerns remain that elevated energy costs could weaken Eurozone growth and eventually reduce inflation pressure.

Commodities

Gold fell below $4,250 per ounce, reaching its lowest level in seven weeks as higher oil prices and hawkish Fed expectations weighed on the metal. Stalled US-Iran negotiations kept energy prices elevated, while markets raised the probability of another Fed hike in October to around 66%. Investors are now focused on US inflation and employment figures for further policy signals.

Silver dropped below $63 per ounce, approaching a seven-week low as higher oil prices reinforced inflation concerns and expectations for further Fed tightening. Hawkish comments from Fed officials and a roughly 66% probability of another October rate hike kept pressure on the rate-sensitive metal.

Currencies

• U.S. Dollar Index (DXY): The Dollar Index climbed toward 101.1, remaining near a two-month high as rising oil prices and hawkish Fed expectations supported the dollar. Several Fed officials highlighted resilient growth and labor market strength as reasons further tightening could be necessary. Investors are now looking toward key US inflation and employment data.
• Euro: The euro declined toward $1.139, near its weakest level in two months, pressured by the stronger dollar and expectations for additional Fed tightening. The currency has lost almost 2% over the past month and nearly 3% over the past year. Strong Eurozone PMI data offered some support by showing the fastest private-sector expansion in almost three and a half years and keeping expectations for another ECB hike alive.
• British Pound: Sterling traded around $1.325, remaining close to a three-month low despite increasingly hawkish Bank of England commentary. Bailey warned about persistent energy-driven inflation, while Breeden and Lombardelli signaled growing support for tighter policy. Markets currently see an 80% probability of a November BoE increase.
• Japanese Yen: The yen weakened toward 158 per dollar as higher US Treasury yields and a stronger dollar outweighed recent support from intervention concerns. The currency had gained around 1% on Friday after Japanese Finance Minister Satsuki Katayama reiterated coordination with the US following July’s joint intervention. Rising oil prices continue to add pressure to Japan’s import-dependent economy.

Economic Data Highlights

• Federal Reserve Interest Rate: The Fed raised rates by 25 basis points to 3.75%–4.00%, its first increase since 2023. Most officials expect at least one additional hike this year, while four anticipate two. GDP forecasts for 2026 and 2027 were revised slightly higher, inflation projections were raised, and unemployment estimates were lowered to 4.1%.
• Bank of England Interest Rate: The MPC voted 6-3 to maintain Bank Rate at 3.75%, with three members favoring a hike to 4%. UK CPI reached 3.1% in August, while the BoE 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%, remaining below the BOJ’s 2% target for a seventh consecutive month. Monthly inflation slowed to 0.1% from a revised 0.5% in July.
• China Industrial Production: Industrial output grew 5.2% year-on-year in August, accelerating from 4.5%. Manufacturing output increased 6.1%, while computers and communications equipment rose 17.2% and railway and shipbuilding production increased 13.4%.

Macro Calendar Highlights

• Tuesday, September 29: US JOLTS Job Openings and Consumer Confidence.
• Wednesday, September 30: US ADP Employment Change and Chicago PMI.
• Thursday, October 1: US ISM Manufacturing PMI, S&P Global Manufacturing PMI, and Initial Jobless Claims.
• Friday, October 2: US Nonfarm Payrolls, Unemployment Rate, and Average Hourly Earnings.