Equity selloff unwinds dollar’s CPI surge

Equity selloff unwinds dollar’s CPI surge

The dollar has surrendered its post-CPI gains as the global equity selloff triggered a flight into Treasuries and pulled US yields lower. DXY has fallen to around 102 from Wednesday’s peak and 2026 high near 102.9, while yields declined by seven to ten basis points across the curve. The reaction captures an unusual tension: the same inflation report that kept the probability of a December hike near 86% also intensified concerns around stretched technology valuations, weakening the dollar through the rates channel.

The selloff has centred on the artificial intelligence trade, with South Korea’s Kospi falling 9% and chipmakers under heavy pressure. Energy remains a wildcard, as Brent near $104 keeps the inflation risk alive while tentative de-escalation signals from Oman raise the possibility of progress in US-Iran talks. A sustained decline in oil would remove one source of inflation pressure and make it harder for the dollar to regain Wednesday’s momentum.

The latest US data, however, have momentarily shifted the focus back to rates. September retail sales rose 0.8% against a 0.3% consensus, while producer prices jumped 1.3% on the month and core PPI increased 0.7%, pointing to firm demand and broader pipeline inflation. The softer 0.1% control-group reading adds some caution around the growth signal, but jobless claims near 200,000 suggest the labour market has not weakened further. With a December hike now almost fully priced and October still in play, Treasury yields should find firmer support near current levels.

DXY has returned to its pre-CPI support near 102, completing part of the correction signalled by the earlier overstretched technical indicators. A sustained break would expose 101.5, although the broader dollar outlook still rests on elevated December hike expectations and persistent energy risks. That makes the current move look tactical for now, but describing every dip as a buying opportunity would be premature until yields stabilize.

Falling US yields offer Loonie brief relief

The Canadian dollar has found some relief as the technology-led equity selloff pulled US yields lower and pushed USD/CAD back toward 1.419. The pair also slipped below its short-term moving average as front-end Treasuries rallied more sharply than Canadian government bonds, narrowing the short-term yield gap. This remains a tactical repricing rather than a fundamental turn for the Loonie, particularly as the broader risk-off backdrop threatens global growth and commodity demand.

Canada’s domestic outlook offers little support for a more sustained recovery. Consecutive monthly employment declines have erased the year’s job gains, while wage growth of 2.3% leaves the Bank of Canada balancing a weakening labour market against lingering inflation pressure ahead of its October 28 decision. Tariffs on Canadian goods and stalled CUSMA discussions add another drag, keeping trade uncertainty firmly embedded in the medium-term outlook.

Strong US retail sales and producer inflation have put a cap on loonie’s brief relief rally. Headline sales rose 0.8% in September and PPI jumped 1.3%, reinforcing expectations for further Fed tightening and threatening to widen the US-Canada two-year spread back.

USD/CAD will need a sustained close below 1.42 to extend the correction toward 1.41. The broader uptrend remains intact while the two-year spread holds near 150 basis points and Canada’s labour market continues to weaken. Next week’s Canadian CPI report is the clearest challenge to that view, but without a meaningful upside surprise, the current pullback is more likely to remain a brief relief for the Loonie.

Euro flirting with key support

The euro remains under pressure following yesterday’s hotter-than-expected US inflation report, with EUR/USD falling to fresh lows last seen in May 2025. The pair is now testing the 200-day moving average near 1.11, a key technical level that could determine whether the recent sell-off extends further or finally begins to stabilise.

The challenge for the euro is increasingly two-fold right now.

First, Fed-ECB rate expectations are moving further in the dollar’s favour. Markets continue to add to Fed tightening expectations after stronger US inflation data, while the ECB’s path looks less certain. Recent remarks from President Lagarde highlighting the absence of meaningful second-round inflation effects, alongside growing concerns over tightening into a weaker growth environment, have tempered expectations for how far the ECB can ultimately go. The result is a widening rate differential that continues to support the dollar.

Second, French fiscal concerns remain an important euro headwind. While the French-German 10-year spread narrowed modestly earlier this week, the broader issue remains unresolved. European yields are increasingly rising for fiscal reasons rather than growth reasons, creating a very different dynamic from the US. Higher Treasury yields reflect resilient growth and inflation; higher European yields increasingly reflect fiscal risk premia.

The result is a difficult backdrop for the single currency. Elevated energy prices, widening real rate differentials, political uncertainty and resilient US economic data are all reinforcing the dollar’s appeal. While EUR/USD is becoming stretched on some technical measures, there is little evidence yet of a catalyst capable of generating a sustained recovery.

For now, the path of least resistance remains lower, with the 1.11 area emerging as the next key battleground for EUR/USD.

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.