USD: a hot inflation print, and still a weaker week
The US dollar lost ground over the week, its first weekly decline after four consecutive gains, as a sharp sell-off in technology shares, a retreat in Treasury yields and cautious remarks from Federal Reserve officials outweighed inflation figures that came in firmer than expected. The shape of the week was telling: the dollar rose to its strongest level in several months on the day of the consumer price index, then gave all of that back and more as the bond market rallied.
In the United States, Wednesday's September consumer price index showed headline inflation rising to 3.7% against expectations of 3.6%, with gasoline accounting for more than half of the monthly increase, while core prices rose 0.3% on the month against 0.2% expected. Thursday's producer prices were firmer still, and retail sales beat expectations, although much of that strength reflected higher prices at the pump rather than more goods sold. Markets interpreted the inflation data as raising the odds of an October increase, with pricing jumping to around even before falling back sharply over the following two sessions.
The reason for that reversal lay with the Fed's own messaging. New York Fed President John Williams said he still saw a case for one more increase but described an economy that is not overheating overall, Vice Chair for Supervision Michelle Bowman saw no urgency to act, and Chair Kevin Warsh, speaking at the IMF meetings in Bangkok, said "I don't prejudge meetings" and that the world had broadly conformed to the Committee's expectations since September. Wednesday's Beige Book added a cautious note of its own, reporting only slight growth on balance and mostly flat consumer spending, even as higher oil prices were felt in every District.
That combination matters because it describes an oil shock rather than an overheating economy. A jump in fuel prices lifts the headline inflation rate immediately, but it also acts as a tax on households, leaving less to spend on everything else, and a central bank that tightens aggressively into that kind of shock risks compounding the slowdown it is already causing. The market's reading, in other words, was that the Committee sees the inflation as real but the case for an urgent response as weaker than the headline suggests.
The bond market did the rest. Treasury yields fell back from the multi-decade highs of recent weeks, helped by a sell-off in AI-related shares that sent investors towards government debt, and the dollar eased with them, even as oil pushed higher again on renewed attacks on shipping around the Strait of Hormuz.
Attention now turns to a much lighter calendar, with housing starts on Tuesday the only major release and Fed officials now in their quiet period ahead of the 27 to 28 October meeting. That leaves the dollar trading on equities, oil and the bond market for most of the week, with the main domestic events arriving the following week, when the first estimate of third-quarter GDP and September's personal income and outlays, including the PCE price index, are both released on Thursday 29 October.
For now, the dollar's recent strength looks to have paused rather than ended. The inflation data has kept a further increase from the Fed on the table, but the Committee has signalled that it is in no hurry, and that leaves the greenback more exposed than it was a fortnight ago to swings in risk appetite and to any calming of the situation in the Gulf.
EUR: a first weekly gain, and a hawkish turn in the commentary
The euro regained ground against the US dollar over the week, rising a little over 0.3% to record its first weekly gain after five consecutive declines, although it lost ground against both sterling and the Swiss franc, which says the move owed more to the dollar's side than to any improvement in sentiment towards the single currency. The euro had fallen to its weakest level in well over a year on Wednesday after the US inflation figures, before recovering as Treasury yields retreated.
Across the euro area, the commentary turned noticeably more hawkish. Governing Council member Gediminas Šimkus said in Bangkok that "we've received more evidence since September that suggest some tightening of monetary policy might be needed", Belgian central bank Governor Pierre Wunsch said the Bank is probably going to have to raise rates again, and President Christine Lagarde struck a more measured but still watchful tone. "We're not seeing any second round effects yet," she said, but "we cannot wait until they are in full view." Markets interpreted the remarks as pointing to a further increase in December rather than at this month's meeting.
Friday's final figures confirmed headline inflation at 3.8% for September, with core inflation edging higher, while industrial production fell for a third consecutive month. That is the uncomfortable mix the European Central Bank faces: inflation driven by energy and broadening at the margin, against an industrial base that is losing momentum, which explains why policymakers talk about the next move as a question of when rather than whether, yet remain reluctant to commit to an early date.
It is worth noting why a more hawkish central bank has done so little for the euro. Higher interest rates support a currency when they reflect a strong economy, but when they are a response to an imported energy shock that is squeezing households and industry at the same time, investors weigh the growth cost as heavily as the extra yield, and the currency gains less than the rate outlook alone would suggest.
In France, the budget debate continued to weigh on the backdrop. Finance Minister Roland Lescure described the recent rise in borrowing costs as an "alarm signal", and Lagarde was explicit that "the primary and first solution lies in French fiscal policy", a remark markets interpreted as ruling out any expectation that the central bank would step in to cap French yields. The implication is that the fiscal question remains one for Paris to settle, and that the euro will stay sensitive to it until it does.
Attention now turns to a week heavy with official commentary, with chief economist Philip Lane speaking on Monday and Wednesday and Lagarde in Wiesbaden on Wednesday evening, ahead of Friday's flash purchasing managers' indices for October, the first read on activity for the new quarter. Eurostat's autumn notification of government deficits and debt on Wednesday will also be closely watched for what it says about France.
The European Central Bank's meeting on 28 and 29 October is the next event capable of resetting the rate story, and on present guidance it looks set to hold while keeping December open. Taken together, the euro's first weekly gain in six owes more to a softer dollar than to anything in Europe, and a convincing recovery would likely need both calmer French bond markets and a clearer signal from Frankfurt.
GBP: a surprise in growth, and a November increase in view
The pound pushed higher against the US dollar over the week, rising close to 0.8%, and firmed against the euro as well, as a better-than-expected growth figure for August and a calmer gilt market combined with a softer greenback. It was a notable reversal from Wednesday, when the US inflation figures pushed sterling to its lowest level in several months and briefly revived the pattern of recent weeks, in which the currency weakened alongside its bonds.
In the United Kingdom, Thursday's monthly estimate showed the economy growing by 0.1% in August against expectations of a small contraction, with the three months to August also stronger than forecast and production leading the way. Markets interpreted the figure as evidence that the economy has more resilience than feared, which matters for the pound because it makes it easier for the Bank of England to tighten without being seen to push the economy towards recession.
The rate story moved in the same direction. A Reuters poll taken early in the week found 54 of 63 economists expecting an increase to 4.00% at the 5 November meeting, while Monetary Policy Committee members Megan Greene and Huw Pill reportedly warned against waiting for more evidence before acting. Governor Andrew Bailey was more measured in Bangkok on Friday, saying second-round effects from the energy shock remain quite subdued and that the economy has proved more resilient than expected. In other words, the debate inside the Committee is about the pace of tightening rather than its direction, and that has given sterling a firmer anchor than it had a month ago.
The bond market offered a calmer backdrop, with gilt yields easing alongside Treasuries after the pressure of recent weeks. The approach of the Autumn Budget on 28 October, and reports that Chancellor John Healey could raise taxes on banks, are nonetheless a reminder that the fiscal question has been deferred rather than resolved, and that the pound's sensitivity to the gilt market has not gone away.
Attention now turns to a busy domestic week, with the labour market figures on Tuesday, the September consumer price index and public sector finances on Wednesday, and retail sales and the flash purchasing managers' indices on Friday. The inflation figures carry the most weight, since they are the last before the November meeting.
A firm inflation print would reinforce expectations of an increase and give the pound further support, particularly if the labour market shows the same resilience as the growth data. Conversely, a softer reading would revive the argument for patience, and would leave sterling more exposed to the gilt market as the Budget approaches.
For now, the pound has the more constructive backdrop of the European currencies, with the growth data and the rate story pointing the same way. The risk is that the Budget, rather than the Bank, sets the tone in the weeks ahead.
JPY: a quieter week, and a firmer line from the board
The yen was marginally firmer against the US dollar over the week, with the pair closing lower for the first time after four consecutive weekly gains, although it remained close to 158 throughout, as a hot US inflation print early in the week was offset by the retreat in Treasury yields and a sell-off in equities that revived some safe-haven demand. Against the euro the yen was slightly firmer, which suggests the week's modest improvement owed as much to the dollar's softness as to the yen itself.
In Japan, the most important words of the week came from board member Junko Koeda, who said on Thursday that the Bank "should not become overly cautious about raising the policy interest rate" and should adjust in a timely manner, adding that she sees the neutral rate as considerably above 1%. Governor Kazuo Ueda was also reported to have said the Bank will continue to raise its policy rate. Markets nonetheless interpreted the week's reporting, including a Bloomberg report that officials are inclined to wait until December, as confirming that the 29 to 30 October meeting is likely to pass without a move.
On the currency itself, Finance Minister Satsuki Katayama said in Bangkok that the authorities were prepared to intervene again if necessary, and that the positions of Japan and the United States were unchanged since the joint intervention in the summer. The message was measured rather than urgent: with the pair below the levels that prompted action, markets interpreted the remarks as a reminder that the line still exists rather than a warning that it is about to be tested.
Elsewhere, wholesale price inflation slowed by more than expected in September, although the broader picture remains one of rising costs. That matters for the Bank because, in an economy that imports most of its energy and much of its food, a weak currency feeds directly into what businesses pay for their inputs, and those costs reach consumers with a lag. Koeda's argument that price risks are skewed to the upside partly because of the yen's weakness is, in other words, an argument that the currency is itself part of the case for tightening.
Attention now turns to September's trade figures on Wednesday and the national consumer price index on Friday, the last major inflation reading before the Bank of Japan's meeting at the end of the month. With no board member speeches scheduled before the meeting, the data will carry more weight than usual in shaping expectations.
Offshore, a light US calendar leaves the pair more sensitive to equity markets and to oil than to US data, and a renewed fall in risk appetite would likely give the yen further support. Any sharp move higher in the pair, by contrast, would bring the Ministry of Finance back into focus quickly, given how clearly Katayama restated the government's position this week.
CAD: a five-week slide ends, with help from oil and Macklem
The Canadian dollar regained ground against the US dollar over the week, breaking a run of five consecutive weekly declines, as higher oil prices and a softer greenback offset lingering concerns over the domestic labour market after the previous week's sharply weaker employment report. The recovery was modest relative to the scale of the earlier losses, but it was the first sign in more than a month that the currency could find support from something other than a pause in US yields.
Oil did much of the work. Crude pushed higher again as attacks on shipping around the Strait of Hormuz kept supply concerns at the forefront, and the Canadian dollar benefited from the improvement in Canada's terms of trade as a major energy exporter. Domestically, a firmer reading on August manufacturing sales offered some modest reassurance after the jobs data, although it did little to change the broader picture of an economy feeling the drag from US tariffs.
Governor Tiff Macklem added a hawkish note in Bangkok on Friday. "We've been looking through the increase in energy prices, but the longer this goes, the harder that gets," he said, a remark markets interpreted as keeping an increase on the table later in the year, even if the chances of a move on 28 October remain well below even after the employment report.
The tension in that comment is worth drawing out. A central bank can usually treat an energy price spike as temporary, since it lifts inflation for a time and then drops out of the annual rate as prices stabilise, but if the shock persists long enough, households and firms start to build higher prices into their expectations and their wage demands, and what began as a one-off becomes a lasting problem. Macklem's point, in other words, is that the Bank's patience has a limit, and that the weakness in employment does not settle the question on its own.
Attention now turns to Monday, when the September consumer price index and the Bank of Canada's Business Outlook Survey are both released, followed by August retail sales on Friday. Together they are the last major domestic inputs before the 28 October decision and Monetary Policy Report.
A firm inflation print and a survey showing businesses expecting higher prices would give weight to Macklem's warning and offer the currency further support. Conversely, a soft reading alongside weak hiring intentions would reinforce the message from the jobs report, and would leave the Canadian dollar more dependent on oil than on the rate story.
CHF: a seven-week slide ends as safe-haven demand returns
The Swiss franc regained ground against the US dollar over the week, rising around 0.8% to break a run of seven consecutive weekly declines, and also firmed against the euro, after touching its weakest level against the greenback in well over a year on Wednesday following the US inflation figures. The turn came late in the week, as a sell-off in technology shares and a retreat in Treasury yields brought safe-haven demand back into play.
That is the pattern worth noting. For much of the past two months, the gap between interest rates in Switzerland and the United States has been wide enough to overwhelm the franc's defensive appeal, since holding francs rather than dollars has meant giving up a meaningful yield. When yields fall and equities come under pressure at the same time, as they did on Thursday and Friday, the cost of that position falls just as the value of safety rises, and the franc tends to recover quickly.
In Switzerland, the week brought little news from the Swiss National Bank, which continues to signal that its policy rate will stay at zero, and producer and import prices for September were softer than expected, falling on an annual basis. That reinforces the view that the Bank has no reason to tighten even as inflation elsewhere in Europe rises, and keeps the franc's direction tied to global risk appetite rather than to domestic policy.
Against the euro, the franc's gain reflected the same forces, with the more hawkish tone from European Central Bank officials doing little to offset a more cautious mood in markets and a continuing unease over French public finances.
Attention now turns to Thursday, when the Swiss National Bank publishes its summary of the September monetary policy discussion, which will be closely scrutinised for any sign of discomfort with the franc's earlier weakness or with imported inflation. The Bank's next assessment is not until 10 December, which leaves the franc trading on offshore developments for most of the quarter.
For now, the franc's recovery depends on whether the late-week shift in risk appetite holds. A renewed sell-off in equities or an escalation in the Gulf would bring further safe-haven demand, whereas a rebound in US yields would quickly revive the rate-gap pressures that drove seven weeks of losses.
NZD: a hawkish chief economist lifts the currency
The New Zealand dollar regained ground against the US dollar over the week, rising around 0.7%, and pushed higher against the Australian dollar, as hawkish remarks from the Reserve Bank's chief economist and a softer greenback late in the week more than offset a fall to a fresh multi-month low after the US inflation figures on Wednesday. The recovery was sharpest across the Tasman, where a weak Australian employment report widened the gap between the two currencies.
The turn came on Thursday, when Chief Economist Paul Conway said at the IMF meetings in Bangkok that the decision on 28 October is "completely open" and that the official cash rate is "most likely to rise", with only the timing undecided. Markets interpreted the remarks as reviving the prospect of an October increase that had faded over the previous fortnight, and the currency recovered some of its losses quickly. Bank economists remain divided, with Westpac still expecting a pause this month and an increase in December.
Friday's selected price indexes underlined why the Bank is uneasy. Petrol prices rose sharply again in September and electricity prices continued to climb, and that matters because fuel and power feed into the cost of almost everything else, from freight to food production, while a small, open economy with a weak currency has little protection from imported energy costs. In other words, the inflation the Bank is worried about is arriving through the exchange rate and the oil price at the same time.
Domestically, polling ahead of the 7 November election continues to point to a close result, with the latest RNZ Reid Research survey suggesting neither main bloc would command a majority without the support of a smaller party. That uncertainty gives investors one more reason for caution, even as the rate story has turned more supportive.
Attention now turns to the run-up to the Reserve Bank's 28 October decision, with the third-quarter consumer price index the domestic release most capable of settling it, and one that will be closely scrutinised after Conway's remarks given how much of the recent rise in prices has come from fuel. Across the Tasman, speeches from Reserve Bank of Australia Assistant Governor Christopher Kent on Monday and Deputy Governor Andrew Hauser on Wednesday will matter for the cross.
Overall, the New Zealand dollar has found more support from its own central bank this week than at any point in the past month. Whether that holds depends on the inflation data confirming Conway's reading, and on the US dollar continuing to ease rather than resuming its climb.