- Cracks in the capex story. Technology stocks led global equity losses as investors questioned whether rising borrowing costs can coexist with the debt-fuelled AI investment boom. The Philadelphia Semiconductor Index and KOSPI are back in bear-market territory, whilst the Nasdaq is down 4% from its peak.
- Hedge restored. Bonds regained their haven appeal as growth fears intensified, restoring the negative stock-bond correlation that has often been absent during the supply-shock-driven 2020s. The 10-year Treasury yield fell to a three-week low.
- Inflation ignored. The bond rally came despite hotter than expected US inflation data that would typically hurt fixed-income markets and drive the dollar higher.
- Not so fast. Fed Chair Warsh dampened expectations of a hike later this month, but his enthusiasm for AI-led growth and synchronised global tightening suggests markets may be pricing out too much hawkishness.
- Dollar dents. Risk-off conditions would normally support the dollar, but the AI trade has become a key pillar of US exceptionalism and capital inflows. As confidence in the sector wavers, so too can support for the greenback. Barring a deeper AI-led sell-off, however, the dollar should remain supported near recent highs.
- On the radar. A raft of business surveys from the world’s major economies looms, offering a timely gauge of whether softening sentiment is starting to translate into slower growth.
Global Macro
Inflation rises as growth signals diverge
US inflation reaccelerates. September CPI rose 0.6% m/m and 3.7% y/y, above forecasts of 0.6% and 3.6%, while core inflation increased 0.3% m/m and 2.6% y/y. Higher headline and core inflation strengthen the case for the Fed to remain restrictive despite September’s weak payroll report.
US demand and prices. Retail sales rose 0.8% m/m vs 0.3% expected, but much of the gain came from a 6.4% jump at gasoline stations; excluding gasoline, sales increased only 0.2%, while the control group rose 0.1%. Producer prices delivered the larger shock, surging 1.3% m/m vs 0.6% expected and 6.3% y/y vs 5.5% expected, with core PPI also hot at 0.7% m/m vs 0.3% expected. The mix points to resilient nominal spending but weaker underlying consumption, alongside a sharp broadening in pipeline inflation.
Australia’s labor market weakens. Employment unexpectedly fell by 39.3k, while unemployment held at an upwardly revised 4.7%, its highest since 2021. Participation also declined to 66.8%, reducing expectations for another near-term RBA hike after September’s increase to 4.60%.
UK growth beats. The UK economy expanded 0.1% m/m in August, beating expectations for a 0.1% contraction, while annual growth accelerated to 2.1%. Manufacturing output rose 1.2% and computer programming supported services, although elevated borrowing costs and the approaching budget continue to constrain the outlook.
China’s export boom masks weak demand. Exports surged, lifting the trade surplus to a record $133.5bn. Producer inflation accelerated to 5.0% y/y vs 4.5% expected, driven by higher energy and commodity costs, but CPI reached only 0.9% vs 1.0% expected and core inflation held at 1.0%.
Week ahead
Sentiment under the microscope
BoE hawkish bets face a reality check. Next week brings the release of the UK’s September inflation report. Markets are pricing a roughly 90% chance of a rate hike next month, with over three priced in by April 2027. This reflects stronger economic momentum and elevated energy prices. However, with Bank Rate already looking restrictive at 3.75%, we remain sceptical the Bank can turn so hawkish beyond a potential move this year.
Why the BoE can afford to wait. The UK labour market report is also due. A soft reading could remind investors why the BoE has yet to tighten further. While unemployment has broadly stabilised this year, wage growth continues to cool, suggesting domestic inflation pressures remain subdued and providing room for patience among MPC members.
PMIs in focus. A raft of sentiment indicators from major economies is due next week, most notably the S&P PMI surveys. The data have remained relatively resilient this year despite geopolitical headwinds. While France’s fiscal turmoil is unlikely to weigh materially on sentiment outside France for now, it remains a growing downside risk should conditions deteriorate further.
FX views
Hot inflation numbers reinforce bullish dollar view
USD Dollar consolidates near 102. The US dollar spent the week consolidating just above the 102 level. A hotter-than-expected September inflation report pushed the index to an 18-month high of 102.945 on Wednesday. Those gains were later trimmed, however. A sharp equity selloff, driven by renewed concerns around AI, triggered a flight to safety and a rebound in bond demand. This is somewhat unusual at a time when bonds have generally been under pressure as central banks maintain a hawkish stance. It may simply be that, after months of selling, fixed-income returns have become too attractive for investors to ignore. We expect the rally in bonds to prove short-lived, however. Geopolitical risks and the Fed’s hiking cycle should continue to support the dollar over the medium term. For now, some consolidation around the 102 level appears likely.
EUR Fiscal Fears dilute ECB hawkishness. EUR/USD hovered around 1.12 throughout the week. Much of the pessimism surrounding France’s fiscal impasse now appears priced in, with French-German yield spreads holding near decade-plus highs. Investors are now looking for progress in budget negotiations, though the chances of a breakthrough remain slim, limiting the scope for a more sustained euro recovery. The rates story also offers little support for the euro, regardless of how it unfolds. One scenario sees the ECB softening its hawkish stance as higher market rates, driven by fiscal concerns, effectively do some of the tightening work on its behalf. The other sees the ECB continuing to signal further rate hikes. Even then, the euro is unlikely to derive much support: geopolitical uncertainty and domestic fiscal risks are increasingly offsetting the currency’s traditional rate advantage.
GBP Resilience returns. Sterling finished the week on a firmer footing, with GBP/USD recovering from the low-1.32s – sticking to a tight range year-to-date. The move was driven primarily by USD weakness rather than GBP strength, as investors took profits on an extended dollar rally. Importantly, the pair reclaimed its 21-day moving average for the first time since early September, suggesting downside momentum is easing after several weeks of consolidation. That said, the pair has yet to reclaim more important resistance levels, meaning the move is still best viewed as a corrective rebound within a broader period of consolidation for now. Against the euro, sterling continues to outperform. GBP/EUR remains close to one-year highs above 1.18, supported more by euro-specific concerns than outright enthusiasm for the UK. Fiscal stresses in France and a softer ECB outlook have continued to weigh on the common currency. Domestically, though, UK GDP surprised to the upside again, reinforcing the narrative that the economy remains more resilient than many had expected despite elevated energy prices and geopolitical uncertainty. Looking ahead, a packed week looms for the pound, with labour market data, inflation and retail sales all due ahead of the next BoE meeting in early November.
CHF Nearly overbought. The Swiss franc extended its recent gains this week as renewed AI-related growth concerns weighed on risk appetite, sending semiconductor stocks lower and boosting demand for safe-haven assets. Falling bond yields added further support to CHF, with USD/CHF suffering its steepest daily decline since August and breaking below its 21-day moving average. EUR/CHF remains around 2% lower month-to-date and is edging closer to its 200-day moving average near 0.92, a level that could attract further technical interest. That said, the case for sustained CHF appreciation is becoming less compelling. The franc is approaching overbought territory after its strong run, while French risk spreads have stabilised and broader market sentiment is showing signs of recovery. With the risk-adjusted carry against the franc still among the most attractive in the G10 and the SNB maintaining a highly accommodative stance, CHF’s haven-driven rally may struggle to extend significantly from current levels.
CAD Rates still dominate. USD/CAD is trading near 1.4199, having retreated from last Friday’s 1.4299 high as safe-haven demand for Treasuries pulled US yields down faster than Canadian equivalents. Brent near $106 has also provided some support for the Loonie, helping the pair resist another push toward 1.43 despite Canada’s weak September labor report. Employment fell 68,300 vs a 10,000 gain expected, following a 42,000 decline in August, while unemployment rose to 6.5%, sharply reducing the odds of an October Bank of Canada hike. Even after the latest compression, the US-Canada two-year yield gap remains historically wide near 150bp, leaving the broader macro bias tilted toward the US dollar. Technically, a sustained close below 1.42 would strengthen the corrective move towards 1.41, while 1.425 and 1.4299 remain the immediate resistance levels. Next week, Canada’s September CPI on October 19 will provide the final major domestic input before the October 28 BoC meeting, with a soft print likely to cement a hold and an upside surprise reopening the tightening debate.
AUD Jobs pain. The Australian dollar had a difficult week, falling to three-month lows after the September employment market report showed job losses and higher unemployment. The result prompted markets to reduce expectations for further Reserve Bank of Australia rate hikes, adding to pressure from weaker risk sentiment. AUD/USD fell as much as 1.1% following the release. The technical picture remains negative, with the 8-day and 21-day moving averages pointing lower and suggesting rallies may remain limited. Attention now turns to Wednesday’s Australian CPI report, which will be critical for the interest rate outlook. A stronger inflation result could help stabilise the Aussie after its recent decline.
CNH Greenback strength ignored in China. The offshore yuan was notably resilient despite the US dollar reaching fresh 18-month highs during the week. USD/CNH largely ignored the greenback’s broader rally and subsequently fell back to fresh three-year lows as the US dollar reversed later in the week. The technical picture continues to favour CNH, with the 8-day and 21-day moving averages for USD/CNH pointing lower. That suggests rallies in USD/CNH may remain limited even if broader US dollar strength returns. Looking ahead, China’s official manufacturing and non-manufacturing PMIs on 31 October be the key events, providing an important update on the strength of China’s manufacturing sector and broader domestic economy.
JPY All eyes on BoJ. We saw a relatively quiet week for the USD/JPY pair but the yen strengthened towards the end of the week as the sell-off in AI-related shares encouraged demand for bonds, pushing US yields lower. USD/JPY fell from one-month highs. The 8-day and 21-day moving averages are flat, providing a neutral signal, with the pair more broadly contained between 156.50 and 159.00. Interest rate expectations remain the key driver, with movements in US Treasury yields continuing to have a major influence on USD/JPY. Friday’s Bank of Japan decision is the key event ahead. A hike seems unlikely, with markets ascribing only a 5.0% probability, but guidance on the timing and pace of any further Japanese interest rate increases will be critical.
MXN Carry threshold breaks. USD/MXN is trading near 18.45 after trading as high as 18.69, leaving the peso close to its weakest level of 2026 as hotter US inflation and rising Treasury yields accelerate the carry unwind. The Mexico-US two-year yield spread has narrowed below the key 300bp threshold to roughly 295bp, weakening the risk-reward that had supported MXN through much of the year. Mexico’s inflation backdrop remains more benign, with September headline CPI at 3.45% and core at 3.75%, but expectations for eventual Banxico easing continue to clash with the Fed’s tightening bias. Trade diplomacy offers some support as Mexico increases purchases of US goods, although delayed USMCA talks and the threat of US diesel-export restrictions remain significant risks. Technically, 18.45–18.5 is the immediate resistance zone, followed by the 18.69 prior high and 19.00, while 18.00 remains the main support. Next week, attention turns to Mexico’s biweekly inflation report and any progress in USMCA negotiations, before the Fed and Banxico policy outlooks again take center stage.
BRL Runoff risk builds. USD/BRL is trading near 5.04, giving back part of the post-election rally that briefly pushed the pair below 4.95, as runoff polls show a much tighter race than markets initially priced. Bolsonaro still holds a narrow lead, but readings around 51% to 49% sit within the margin of error, challenging expectations of an easy victory and renewed fiscal discipline. The real retains strong support from a roughly 905bp two-year yield advantage, while September inflation at 4.42% y/y leaves room for the BCB to continue easing gradually. Still, the proposed reduction in Brazil’s workweek and doubts over whether either candidate can stabilize public debt have tempered the initial fiscal optimism. Technically, USD/BRL is consolidating between 5.0 and 5.05; a break below 4.95 would bring 4.70–4.80 into view, while a move above 5.1 would signal that election risk is rebuilding. Next week, Brazil’s IPCA-15 inflation report and fresh polling will shape positioning ahead of the October 25 runoff, the decisive catalyst for the real.
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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.
