FX Daily · Friday, 16 October 2026
Dollar: inflation surprises, the rate premium fades
By Walid Qairmi, Macro Edge, written by AI · data as of 08:11 CEST
Two inflation surprises in two days have done nothing for the dollar: after a CPI of 3.7% and a PPI of +1.3% on the month, the US 2-year yield closed on Thursday at 4.77%, below its level on the eve of the CPI, and our dollar index fell to 102.11. Rates accounts are reading an energy shock rather than entrenched inflation, and the correction in AI stocks added demand for Treasuries that took 9 bp off the 10-year yield, to 5.10%. Overnight, Fed Chair Warsh declined to give any guidance on the 28/10 meeting ahead of the blackout that begins on Saturday, leaving the probability of a hike at around 27% and the DXY at around 101.80. The data calendar is thin today, with US import prices at 14:30 the only serious test, and our bias remains neutral on the dollar overall: it is losing ground against the franc and the yen, and gaining against the AUD.
What moved the market
Two inflation surprises, no premium for the dollar
The facts
September CPI, released on Wednesday, came in at 3.7% year on year (consensus 3.6%) and 2.6% excluding food and energy (consensus 2.5%), with petrol up 34.2% year on year. On Thursday, PPI rose 1.3% on the month against 0.6% expected, or 6.3% year on year, and its core measure 0.7% (5.0% year on year, after 4.6%). Retail sales gained 0.8%, but the control group only 0.1% (consensus 0.3%), with petrol stations up 6.4%. These figures come from consistent secondary sources, as the BLS and Census releases were not consulted. Brent is trading at around $105.3–105.5 in Asia on futures; the latest weekly EIA value in our data set, $120.03, dates from 02/10.
The market
The 2-year yield closed on Thursday at 4.77% (-5 bp), below the 4.79% of 13/10, the eve of the CPI, and the 10-year fell 9 bp to 5.10%, its lowest since 22/09. The 2s10s slope narrowed from 37 to 33 bp. According to CME FedWatch, the probability of a hike on 28/10 fell back to 27.1%, from 50% the day before, after briefly reaching around 47% just after the PPI. Our dollar index is down 0.11% at 102.11 and EUR/USD has risen to 1.1208.
Our reading
Our reading is that rates accounts are treating the wave of price rises as an energy supply shock: control-group volumes are stagnating while petrol inflates nominal sales, and the gap between headline and core CPI exceeds one point. Part of the fall in long-term yields, however, reflects a flight to quality linked to equities (third driver), which blurs the signal. Without a rise in the 2-year yield, these surprises have given the dollar no rate support.
% year on year (l.), % year on year (r.)
Sources : BLS (CPIAUCSL, CPILFESL), Macro Edge Terminal (OFFI panel) 01/09/2026.
% (l.), % (r.)
Sources : US Treasury (DGS2, DGS10), Macro Edge Terminal (CURV panel) 15/10/2026.
Headline CPI and Core CPI. Headline at 3.72% and core at 2.57% have been diverging since the spring, in step with energy prices. The market uses this gap to justify treating the September surprise as transitory.
US 2-year and US 10-year. On Thursday, the 10-year yield fell 9 bp and the 2-year 5 bp: the 2s10s slope narrowed from 37 to 33 bp. Coming the day after two inflation surprises, this bull flattening indicates that investors bought the long end as a safe haven, without pricing inflation into it.
Warsh declines to guide the market ahead of 28 October
The facts
The Fed Chair spoke at 05:30 (Paris time) in Bangkok, in conversation with Kristalina Georgieva. According to available reports, Warsh pledged to deliver price stability, declined to prejudge upcoming meetings and said the Fed was ‘no longer in that business’ of forward guidance. Warsh also sees AI as a possible positive supply shock over the medium term. This was the last speech by a senior official before the blackout that begins on 17/10. On Thursday, Daly had judged further hikes probably necessary, without urgency, and Bowman said on Wednesday, before the CPI, that the Fed had time to wait.
The market
The ICE DXY fell by 0.15 to 0.22% to around 101.80–101.82 in Asia, its lowest in ten days according to FXStreet, and EUR/USD traded between 1.1215 and 1.1230. Gold rose back towards $4,200 an ounce, after a low of $4,066 in the wake of the CPI. On Wednesday ING placed DXY support between 101.75 and 101.85: the dollar is reaching it this morning.
Our reading
Traders read this silence as a failure to endorse an October hike, in line with UBS's view that a hike on 28/10, six days before the midterm elections, would be ‘politically untenable’. Yet the September minutes show that 16 of 18 participants see at least one more hike by the end of the year: the disagreement is about timing, and the direction remains upward. The 2-year yield, already 77 bp above the top of the fed funds range (3.75–4.00%), suggests that the front end has priced in a good part of the cycle. During the eleven days of blackout, only the data will be able to shift this pricing.
points (l.), % (r.)
Sources : ECB (Macro Edge calculation), US Treasury (DGS2), Macro Edge Terminal (2A-FF panel) 15/10/2026.
% year on year (l.), % (r.)
Sources : BEA (PCEPILFE), US Treasury (DGS2), Macro Edge Terminal (IMPLIED panel) 01/08/2026.
DXY and US 2-year. Our dollar index followed the 2-year yield in its September rise, from 98.61 on 09/09 to 102.41 on 07/10. Since then, the 2-year has stalled below its 4.92% peak of 28/09 and the index has slipped towards 102.11; a fresh rise at the front end would be needed to revive the dollar.
Core PCE and US 2-year. Core PCE stood at 3.01% in August and the 2-year yield is at 4.77%, about 77 bp above the top of the fed funds range. The front end already prices in part of the hiking cycle, which reduces the dollar's sensitivity to new surprises.
The AI correction separates safe havens from cyclical currencies
The facts
On Wednesday, the S&P 500 lost 1.11% to 7,718.94, the Nasdaq Composite 1.9% and the semiconductor index 4.5%, on concerns about debt levels among AI players (CoreWeave -15%). Asia followed on Thursday, with the Kospi at -8.02% and the Nikkei at -5.13%. Wall Street stabilised on Thursday (S&P 500 +0.33%, Russell 2000 +1.38%) thanks to a rotation out of semiconductors, and Asia is rebounding this morning (Nikkei +1.38%, Kospi +1.6%).
The market
The franc posted the biggest gain against the dollar among the majors (USD/CHF -0.38% at 0.8302), ahead of the yen (USD/JPY -0.30% at 157.98), while the AUD lost 1.41% to 0.6911. The 10-year yield touched 5.04% intraday according to Saxo. Implied EUR/CHF stands at around 0.9305.
Our reading
Investors appear to be separating the US asset from its currency: they are buying Treasury duration and selling the dollar against the franc and the yen. As long as the AI correction remains an open risk, this configuration hurts equity-beta currencies, led by the AUD and the NZD, more than it benefits the dollar. This morning's Asian rebound eases that pressure; a lasting stabilisation in semiconductors would be the first sign of a reversal.
The FX Daily signature
Pricing gap
Pricing rests on core CPI, while upstream prices signal a pass-through that consumers have not yet paid for. If it materialises, the front end has almost no premium for October and the dollar would rebound from the bottom of its range, the DXY support at around 101.75–101.85.
The narrative
The market appears to have filed the rebound in inflation under oil shock: the probability of a Fed hike on 28/10 has fallen back to 27.1%, from 50% on Wednesday, and the expected hike is sliding towards December. The 10-year breakeven, at 2.32% in October, has not moved.
The data
Core CPI at 2.57% supports this reading, but core PCE, the Fed's benchmark measure, remained at 3.01% in August and has been around 3% since March. Above all, PPI excluding food and energy rose 0.7% on the month and 5.0% year on year, against 4.6% in August, and the measure excluding food, energy and trade shows +0.5% on the month. The September minutes show 16 of 18 participants in favour of at least one more hike this year.
What closes it
Import prices at 14:30 give a first indication of pass-through. September core PCE above 3% or a probability of a 28/10 hike back above 40% would close the gap in the dollar's favour; a pullback in core PPI next month would prove the market right.
% (l.), % (r.)
Sources : Federal Reserve (T10YIE, DFII10), Macro Edge Terminal (5Y5Y panel) 01/10/2026.
% year on year (l.), % year on year (r.)
Sources : BEA (PCEPI, PCEPILFE), Macro Edge Terminal (OFFI panel) 01/08/2026.
10-year breakeven and 10-year real yield (TIPS). September's rise in long-term yields came from the real yield (from 2.44% in August to 2.93% on a monthly average basis), with the 10-year breakeven staying between 2.31% and 2.36%. Traders have therefore not raised their inflation expectations; core PPI could challenge this stability.
Headline PCE and Core PCE. Headline PCE was 3.42% and core 3.01% in August, between 2.98% and 3.16% since March. On the Fed's benchmark measure, core inflation is not converging towards 2%, contrary to what core CPI suggests.
Currency by currency
The biases taking shape
AUD · An employment shock concentrated in part-time work
AUD/USD lost 1.41% to 0.6911, the biggest move of the day among the majors, after a disappointing September labour force survey: -39,300 jobs against +20,000 expected and unemployment at 4.7% (4.72% unrounded) against 4.6%. According to Saxo, the pair touched its lowest since 2 July. RBA pricing has retreated: the probability of a hike in November has fallen from 26% to 15%, and that of December from 62% to 43%, with the cash rate at 4.60% since September.
In the detail, full-time employment rose by 34,400, the entire decline came from part-time work (-73,700) and hours worked increased by 1.3 million. Unrounded unemployment nevertheless exceeds the RBA's year-end projection (4.5%), which is enough to weaken the hike scenario until the quarterly CPI on 28/10.
Our bias remains bearish in the short term, driven as much by the correction in AI stocks as by the RBA, as the AUD is the major most exposed to sentiment on Asian equities. Confidence is low: the strength of full-time employment could justify a partial rebound if equities stabilise.
- Bias
- Baissier · confidence faible
- Invalidation
- AUD/USD back above 0.7010, its level before the jobs data, or third-quarter CPI on 28/10 that lifts the probability of a December hike back above 60%.
GBP · A hike in the bag, and Bailey cools expectations for what follows
Sterling gained 0.4% after better-than-expected August GDP (+0.1% on the month against -0.1% expected, +0.7% over three months), then gave the gain back: GBP/USD ended at 1.3247 (-0.15%) and EUR/GBP rebounded to 0.8461, after a low of 0.8438 on 14/10. The 10-year gilt yield fell 9 bp to around 5.34% after the release.
A hike to 4% on 05/11 is priced at around 100%, and 54 of the 63 economists polled by Reuters expect it, with a narrow majority for a hold afterwards. Bailey said overnight that there were few signs of inflation becoming embedded in prices and wages, and that second-round effects had been ‘moderate’ so far. Core CPI at 2.6% in August and unemployment at 4.9% support that view.
Our reading is that the asymmetry works against sterling: the November hike can no longer surprise, while the message on what follows may turn out dovish. The September vote (6-3, with three members for a hike) is a reminder that part of the committee is pushing the other way, and the market reaction to Bailey's remarks could not be verified.
% year on year (l.), % (r.)
Sources : ONS (DKO8), Bank of England, Macro Edge Terminal (OFFI panel) 01/08/2026.
UK core CPI has fallen from 3.1% in March to 2.5–2.6% since April, below a Bank Rate of 3.75%. Bailey relies on this decline, which argues against a BoE hike beyond November.
- Bias
- Baissier · confidence faible
- Invalidation
- EUR/GBP falling back below 0.8438, the low of 14/10, or pricing that starts to factor in a second BoE hike after November.
JPY · The rate differential pulls USD/JPY back below 158
USD/JPY is down 0.30% at 157.98, some way off the 158.60 of 12/10; it was trading at around 158.17 early in the Asian session, with support at 157.50 according to FXStreet. The move comes from the fall in the US 10-year yield (-9 bp) more than from Japanese rates: the 10-year JGB yield is holding at 2.94% this morning (+1 bp). The long-term yield spread therefore stands at around 216 bp, against a September average of 224 bp.
The BoJ (1.25% according to secondary sources) is expected to leave rates unchanged on 30/10, and the market prices a December hike at around 88–90%, with a terminal rate of about 2.5% according to MUFG. The 160 area is still seen as sensitive for intervention, which caps the pair. This morning's rebound in Asian equities (Topix +1.75%), on the other hand, is curbing safe-haven demand.
% (l.), % (r.)
Sources : US Treasury (DGS10), OECD (IRLTLT01JPM156N), Macro Edge Terminal (SPRDS panel) 01/10/2026.
On a monthly average basis, the spread between the US 10-year and the JGB widened from 181 bp in August to 224 bp in September, accompanying USD/JPY towards 158. In October, the fall in the US 10-year yield is starting to unwind this move.
- Bias
- Haussier · confidence faible
- Invalidation
- USD/JPY above 158.60, the high of 12/10, or the US 10-year yield back above 5.20%.
The scenarios
US import prices for September (14:30, BLS); consensus +0.6% on the month, after +0.7%
| If | Then |
|---|---|
| Stronger than expected | Upstream pass-through confirmed after the PPI → US short-term rates ↑, probability of a 28/10 hike ↑ → USD probably supported against EUR and JPY → Sensitive pairs: EUR/USD, USD/JPY |
| In line | No new information on inflation → AI stocks and oil remain the drivers → USD within its range, DXY between 101.75 and 102.40 → Sensitive pairs: AUD/USD, USD/CHF |
| Weaker than expected | Contained energy-shock reading reinforced → US short-term rates ↓, 2s10s slope stable → USD under pressure, DXY below 101.75 possible → Sensitive pairs: EUR/USD, USD/JPY towards 157.50 |
Paris time
Today's agenda
| Time | Event | Consensus | Précédent | FX sensitivity |
|---|---|---|---|---|
| 11:00 | Euro area: September HICP, final estimate (Eurostat) | 3.8% y/y; core 2.5% | flash 3.8%; core 2.5% | |
| 11:00 | Euro area: August trade balance | €4.5bn | €5.0bn | |
| 14:15 | Canada: September housing starts | 230k | 229k | |
| 14:30 | United States: September import prices (BLS) | +0.6% m/m | +0.7% m/m | |
| 15:15 | United States: September industrial production and capacity utilisation (Fed) | +0.4% m/m; capacity utilisation 76.5% | 0.0%; capacity utilisation 76.3% | |
| 22:30 | New Zealand: September BusinessNZ PMI (time to be confirmed) | 53.1 | n/a |
Invalidation
What would change ourmind
Our reading of a dollar stripped of its rate premium, neutral on average but weak against safe havens, would be called into question by:
- A probability of a Fed hike on 28/10 back above 40% on CME FedWatch, a sign that rates accounts are taking upstream inflation seriously.
- The US 2-year yield back above 4.85%, which would restore the dollar's front-end support.
- A lasting rebound in AI stocks that takes the 10-year yield back above 5.20% and strips the franc and the yen of their safe-haven role.
- The Macro Edge dollar index above 102.41, the peak of 07/10, or EUR/USD below 1.1177, the low of 07/10.
In short
What you need pick
The dollar is in a regime where inflation surprises no longer feed through to the front end: rates accounts are reading an energy shock, and the correction in AI stocks is fuelling demand for Treasuries. The dominant trade pits the franc and the yen, which are gaining against the dollar, against equity-beta currencies such as the AUD, which are losing. The main risk lies in core PPI, at 5.0% year on year: downstream pass-through would catch the market with no premium priced for October. The next tests are import prices at 14:30, Canadian CPI on Monday and New Zealand CPI on 22/10, ahead of the FOMC on 28/10.
Taken at 08:28, Paris time
The markets in numbers
| Price | 1 session | 1 month | Since 31/12 | |
|---|---|---|---|---|
| Currencies | ||||
| EUR/USD | 1.1208 | +0.12% | −2.87% | −4.61% |
| USD/JPY | 157.98 | −0.30% | +1.92% | +0.83% |
| GBP/USD | 1.3247 | −0.15% | −1.75% | −1.63% |
| USD/CHF | 0.8302 | −0.38% | +1.47% | +4.73% |
| USD/CAD | 1.4207 | −0.08% | +2.06% | +3.76% |
| AUD/USD | 0.6911 | −1.41% | −3.01% | +3.40% |
| NZD/USD | 0.5601 | −0.24% | −2.72% | −2.86% |
| EUR/GBP | 0.8461 | +0.27% | −1.13% | −3.04% |
| Dollar index (Macro Edge calculation) | 102.11 | −0.11% | +2.50% | +3.94% |
| Rate | ||||
| US 2-year | 4.77 % | −5 bp | +10 bp | +130 bp |
| US 10-year | 5.10 % | −9 bp | +10 bp | +92 bp |
| Commodities | ||||
| Brent | 120.03 | +2.52% | +33.77% | +89.89% |
| WTI | 98.07 | +4.81% | +15.89% | +69.06% |
| Gold (monthly average) | 4,335 | n/a | −1.92% | +0.48% |
Changes in % for prices, in basis points for rates. Each line carries the date of its latest official release: ECB reference rates (around 4 pm the day before), US Treasury, EIA (spot prices, a few days' lag), IMF for metals (monthly averages). The dollar index is calculated by Macro Edge from ECB rates, using the historical index weights. Official sources, via the Macro Edge Terminal.
Sources
- 1. Australian Bureau of Statistics, Labour Force, Australia, September 2026, 15/10/2026.
- 2. Office for National Statistics, GDP monthly estimate, UK: August 2026, 15/10/2026.
- 3. Federal Reserve, FOMC statement, 16/09/2026.
- 4. Federal Reserve, Minutes of the Federal Open Market Committee, September 2026, réunion des 15-16/09/2026.
- 5. Federal Reserve, October 2026 calendar, 10/2026.
- 6. Bank of England, Monetary Policy Summary and Minutes, September 2026, 09/2026.
- 7. Eurostat, Euro area annual inflation up to 3.8% (flash estimate), 02/10/2026.
- 8. Saxo, Market Quick Take, 15 October 2026, 15/10/2026.
- 9. Saxo, Asia Market Quick Take, 16 October 2026, 16/10/2026.
- 10. Zacks via TradingView, PPI, Retail Sales Jump, Claims Stay Resilient, 15/10/2026.
- 11. Yahoo Finance / Zacks, Stock Market News for Oct 15, 2026, 15/10/2026.
- 12. Seeking Alpha via TradingView, October rate hike odds retreat below 30%, 15/10/2026.
- 13. Yahoo Finance, Traders Give Warsh A 42% Chance…, 15/10/2026.
- 14. Kaohoon International, Fed Chairman Warsh Refuses to Give Rate Signals, 16/10/2026.
- 15. FXStreet, United States Dollar Index extends decline to near 101.80 after Fed Warsh's remarks, 16/10/2026.
- 16. Bloomberg, BOE's Bailey Sees Little Evidence of Second-Round Inflation, 16/10/2026.
- 17. CNBC, UK economy grew 0.1% in August, 15/10/2026.
- 18. Mitrade, Australian Dollar crumbles as job losses shatter RBA rate hike hopes, 16/10/2026.
- 19. Seoul Economic Daily, US rate path clouded as markets await Warsh's Oct 16 remarks, 16/10/2026.
- 20. investingLive, Macklem in Bangkok: oil, tariffs and job losses test the Bank of Canada's hike case, 16/10/2026.
- 21. Gulf News, Oil edges lower in Asian trade, Brent holds above $105, 16/10/2026.
- 22. MUFG Research, Japan Economic & Financial Weekly, 13/10/2026.
- 23. Admiral Markets, ECB meeting October 2026, 10/2026.
- 24. Action Forex, Economic calendar for the week, 10/2026.
- 25. Trading Economics, 10-year JGB and Brent, Asian session, 16/10/2026.
- 26. ING THINK (counterpoint), FX Daily: Markets preview the AI correction, 15/10/2026.
- 27. UBS via Yahoo Finance (counterpoint), October Fed hike seen as politically untenable, 10/2026.
- 28. Rabobank via FXStreet (counterpoint), EUR/CHF and euro area budget tensions, 07/10/2026.
This publication is provided for information purposes only and is neither investment advice nor a recommendation to buy or sell any financial instrument. Written with the help of artificial intelligence (Claude, Anthropic) and published under the editorial responsibility of Walid Qairmi, publication director of Macro Edge. Figures are facts, sourced and dated; biases and scenarios are the author's opinions as of the publication date and may change without notice. The author is a student and keeps learning every day. Conflicts of interest: the author may personally take positions on some of the ideas presented; Macro Edge receives no compensation from any broker, issuer or third party for this publication.
