FX Daily · Monday, 19 October 2026
Dollar: October fades, December holds
By Walid Qairmi, Macro Edge, written by AI · data as of 08:11 CEST
The dollar fell 0.39% on Friday, to 101.71 on our index, posting its first weekly decline in more than a month, even though US inflation for September surprised to the upside. The front end led the move: by refusing to commit on October, Kevin Warsh pushed the probability of a hike this month back towards 13 to 17%, and the 2-year yield has fallen 8 bp since the CPI, to 4.74%. The sell-off in AI-related stocks pushed accounts towards duration and the franc: the Nasdaq lost 2.1%, and the kiwi, the Aussie and sterling led the G10. With no US data and the Fed in its blackout period, Canada's CPI at 14:30 is the only catalyst of the day, with the BoC priced at around 34% for a hike on 28 October. Our bias on the dollar remains neutral: December is still priced at more than 90%, and as long as the 2-year yield holds above 4.67%, the greenback's retreat looks like a purge of the October premium.
What moved the market
Warsh takes October off the table, the front end keeps December
The facts
On Friday at around 05:30 Paris time, during a discussion with the IMF in Bangkok, Kevin Warsh declined to say what he would do at the remaining meetings of the year, describing October and December as decision points. He nonetheless described a resilient economy, a "synchronous" global tightening and a demand shock linked to AI investment that is pushing up near-term inflation. These remarks came two days after September CPI at 3.7% year on year, against 3.4% in August, with the core measure at +0.3% on the month when the LSEG consensus expected 0.2%. The Fed, which raised rates to 3.75-4.00% on 16 September, has been in its blackout period since Saturday, ahead of the FOMC on 27 and 28 October.
The market
Traders read the lack of commitment as a postponement. The probability of an October hike, which had risen to 54% just after the CPI on 14 October, fell back towards 13% according to CME FedWatch, while December remains priced at 91-92%. The 2-year yield fell 3 bp on Friday, to 4.74%, 8 bp lower than on CPI day. The dollar followed: our index is down 0.46% on the week and EUR/USD ended at 1.1253 at the ECB fixing, its highest since 6 October.
Our reading
Our reading is that the market has moved the October hike to December. At 4.74%, the 2-year yield remains around 87 bp above the midpoint of the fed funds range, a gap consistent with at least one further hike. The dollar has therefore lost the premium for an imminent hike while keeping its carry. ING sums up the condition for a deeper fall in the greenback: short-term rates need to break lower, and 8 bp is not enough to speak of a break.
points (l.), % (r.)
Sources : ECB (Macro Edge calculation), US Treasury (DGS2), Macro Edge Terminal (2A-FF panel) 16/10/2026.
% year on year (l.), % year on year (r.)
Sources : BLS (CPIAUCSL, CPILFESL), Macro Edge Terminal (OFFI panel) 01/09/2026.
DXY and US 2-year. Our dollar index and the 2-year yield fell together on Friday, to 101.71 and 4.74%. The 60-session correlation is only 0.13: the greenback tracks the front end on Fed days, much less so between meetings.
Headline CPI and Core CPI. Headline CPI rose to 3.7% year on year in September, against 2.4% in January according to the data record, and the core measure moved from 2.45% to 2.57% in one month. This acceleration, driven by petrol, explains why December remains priced at more than 90% even though the 2-year yield has fallen since the release.
The AI sell-off feeds Treasuries and the franc
The facts
Wall Street opened a new leg lower on Friday: the Nasdaq lost 2.1% to 26,140, its worst week since June, and the S&P 500 1.1% to 7,659, with stress spreading to the credit of data centre operators. The US 10-year yield fell 15 bp on the week, to 5.09%, and the 2-10-year slope came back to +35 bp, against +47 bp on 5 October. Since that date, the 10-year yield has lost 22 bp and the 2-year 10 bp, so the flattening is coming from the long end.
The market
The risk-off move did not benefit the dollar. The franc led the move, with USD/CHF falling 0.75% to 0.8240, its lowest since mid-September, while the kiwi (+1.13%), the Aussie (+0.69%) and sterling (+0.67%) gained despite the fall in equities. Overnight, the Nikkei lost 0.8% and the Taiex 1%, but US futures were slightly higher.
Our reading
The session is consistent with an AI shock reaching the dollar through lower US yields, a correlation observed over only a few sessions. The monthly series point the same way: the 10-year real yield moved from 2.93% in September to 2.74% in October, while the breakeven stayed stable at 2.35%. Macquarie sees a pullback in AI investment prospects as the main threat to the greenback. We add one condition: this fear has to reach the front end, which the 2-year yield has done to the tune of only 8 bp. If equities stabilise, the opposite logic may return, since Warsh himself counts AI among the drivers of near-term inflation.
% (l.), % (r.)
Sources : Federal Reserve (T10YIE, DFII10), Macro Edge Terminal (5Y5Y panel) 01/10/2026.
% (l.), % (r.)
Sources : US Treasury (DGS2, DGS10), Macro Edge Terminal (CURV panel) 16/10/2026.
10-year breakeven and 10-year real yield (TIPS). Between September and October, the 10-year real yield fell from 2.93% to 2.74% while the breakeven stayed at 2.35-2.36%. The easing in long-term yields is therefore coming through the real yield, which is consistent with a revision of growth prospects and leaves expected inflation intact.
US 2-year and US 10-year. The 2-10-year slope came back to +35 bp on Friday, against +47 bp on 5 October: the 10-year yield lost 22 bp over the period, the 2-year 10 bp. Accounts appear to be seeking protection against the equity correction at the long end.
The yen pays for the barrel, despite Tokyo
The facts
The weekend mixed two opposing signals on oil supply. The IRGC says two tankers caught fire on Saturday after hitting mines in the Strait of Hormuz, without confirmation from an independent maritime authority, while transits there fell to 2 on 11 October against around 85 a day before the crisis. On Friday, Donald Trump signed an order lifting the sanctions and tariffs on importers of Russian oil provided for by the "Graham" law, two days before they were due to take effect. The Brent future, which had closed at around $109.86 on Friday, was trading at $107.86 (-1.8%) this morning in Asia; the EIA spot price in the data record, $127.43 on 9 October, measures the physical market and is not comparable with these quotes.
The market
USD/JPY ended Friday almost unchanged at 158.02 (+0.03%) and was trading at 158.09 this morning, even as US yields fell. Over the week, the yen gained only 0.15% at the ECB fixing, despite the warning from Finance Minister Satsuki Katayama, who is ready to "intervene again if necessary" after the joint intervention with the United States in July. The 10-year JGB yield was back at 2.90% this morning according to Trading Economics, against a record 3.055% on 24 September.
Our reading
For an energy importer, a barrel close to $110 seems to weigh more than a few basis points of easing in Treasuries. Added to this is a BoJ that, according to Bloomberg, is leaning against a back-to-back hike at its meeting on 29 and 30 October. Our reading is that the yen remains driven by oil and by the threat of intervention, which caps the pair below 158.95, the 14 October high. The Russian waiver pushed the barrel down 1.8% despite the mines; if this decline continues, the euro and the yen would be the first to benefit, and the loonie would suffer.
% (l.), % (r.)
Sources : US Treasury (DGS10), OECD (IRLTLT01JPM156N), Macro Edge Terminal (SPRDS panel) 01/10/2026.
yen per dollar (l.), $ per barrel (r.)
Sources : ECB, EIA (spot Brent), Macro Edge Terminal (OILFX panel) 16/10/2026.
US 10-year and 10-year JGB. The monthly spread between 10-year Treasuries and JGBs widened from 181 bp in August to 224 bp in September. A spread of this size is consistent with USD/JPY not returning below 158 despite a few basis points of US easing.
USD/JPY and Brent. Since early September, EIA spot Brent has risen from $99.09 to $127.43 (9 October) and USD/JPY from 154.75 to 158, with a correlation of 0.26 over 60 sessions. The link remains modest but it is consistent with a yen paying for Japan's energy bill; the Brent future, at $107.86 this morning, measures a different price.
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Pricing gap
A November hike would be a response to an imported energy shock, while domestic inflation measures and the labour market are easing. The pricing therefore seems to reflect fear of second-round effects more than what the underlying series show. For sterling, the risk is asymmetric: the market has priced in the expected hike, but not any doubt about the rest of the cycle.
The narrative
The market and most economists expect the BoE to raise Bank Rate from 3.75% to 4.00% on 5 November, with a probability of between 77% and 94% depending on the source; 54 of the 63 economists polled share this scenario. Sterling, at its highest since 22 September against the dollar and down 1.8% since 7 September against the euro, already prices in this hike.
The data
UK core CPI stayed at 2.6% from May to August, 115 bp below Bank Rate. Unemployment has been at 4.9% in the last four readings and wage growth has come back to 3.7%, against 5.0% a year earlier. Only headline inflation is accelerating, to 3.1% in August, because of energy.
What closes it
Tuesday's labour data and above all Wednesday's CPI at 08:00, expected at 3.4-3.5% for headline. Core accelerating towards 2.8% or higher would prove the market right; core staying at 2.6% with headline driven by energy would make the November hike more fragile than pricing of 77-94% suggests.
% year on year (l.), % (r.)
Sources : ONS (DKO8), Bank of England, Macro Edge Terminal (OFFI panel) 01/08/2026.
% of the labour force (l.), % year on year (r.)
Sources : ONS (MGSX, KAB9), Macro Edge Terminal (OFFI panel) 01/06/2026.
Core CPI and BoE Bank Rate. UK core CPI has been stable at 2.6% since May, 115 bp below a Bank Rate of 3.75%. A hike in November would therefore rest on headline inflation, at 3.1% in August and expected at around 3.4-3.5% in September.
Unemployment rate and Wages (AWE). UK unemployment has been at 4.9% in the last four readings, after a peak of 5.2%, and wage growth has come back to 3.7%, against 5.0% a year earlier. Domestic pressure is receding, which sits awkwardly with a hiking cycle.
Currency by currency
The biases taking shape
CAD · A CPI to settle a "live" BoC
USD/CAD fell 0.32% on Friday, to 1.4161, its lowest since 25 September, and was down a further 0.14% this morning. The move follows broad dollar weakness, even as the loonie's own fundamentals deteriorate: the Brent future fell 1.8% overnight on the Russian waiver, and Canadian employment dropped by 68,000 in September, its second decline. The market still prices around a 34% chance of a 25 bp hike on 28 October, with the policy rate at 2.25%, unchanged for almost a year.
September CPI, released at 14:30, is the last before the meeting. The Reuters consensus expects 3.2% year on year, after 3.0% in August; ING is looking for 3.3% and RBC for 3.0%, with core at 1.8% according to RBC. A rise driven by petrol would leave the BoC with an argument for caution, all the more so as the labour market is deteriorating. Our bias on the loonie is bearish as long as headline does not exceed 3.3%, and the BoC surveys, expected at around 16:30, may extend the reaction.
- Bias
- Baissier · confidence faible
- Invalidation
- A CPI at 3.3% or higher with rising core measures, and USD/CAD closing below 1.4143, its level of 25 September.
GBP · Sterling prices in a hike that core inflation does not yet call for
GBP/USD gained 0.67% on Friday, to 1.3335, its highest since 22 September, and EUR/GBP came back to 0.8438, down 1.8% since 7 September. Sterling benefited from dollar weakness and from August GDP at +0.1% on the month against -0.1% expected, according to press reports, as the ONS release was not consulted. The market prices a BoE hike to 4.00% on 5 November, with a probability of 77% to 94% depending on the source, and 54 of the 63 economists polled share that view.
This week tests that pricing: labour data on Tuesday at 08:00, then September CPI on Wednesday at 08:00, expected at 3.4% (Newsquawk) or 3.5% (ING) against 3.1% in August. Energy makes an acceleration in headline likely; the sensitive point is core, which has stayed at 2.6% for four months in a row according to the data record. We remain neutral: sterling keeps the support of the rate differential, but it has already priced in most of the expected hike.
- Bias
- Neutral · confidence faible
- Invalidation
- Core CPI at 2.8% or higher on Wednesday would turn the bias bullish; stable core alongside weaker labour data on Tuesday would take EUR/GBP back above 0.8461, its close of 15 October.
JPY · The barrel holds back the yen, Tokyo keeps control near 159
USD/JPY ended the week at 158.02, almost at its 9 October level (158.25), even as the US 10-year yield lost 15 bp over the period. The yen has therefore drawn almost no benefit from the easing in Treasuries. In the monthly data record, the 10-year spread between the United States and Japan widened from 181 bp in August to 224 bp in September, a level compatible with the pair staying close to its highs. The BoJ, which meets on 29 and 30 October, is leaning against a back-to-back hike according to Bloomberg; its current policy rate could not be verified.
At 158.95, the 14 October high, the pair is approaching the zone where Satsuki Katayama renewed her warnings, after the joint intervention with the United States in July. Prime Minister Takaichi also referred overnight to JGB issuance "at an appropriate level", though the content of her statement is not known. We remain neutral: a Brent future durably below $107.86 or a BoJ hike back on the table for October would tilt the bias in favour of the yen.
- Bias
- Neutral · confidence average
- Invalidation
- USD/JPY above 158.95 with no verbal reaction from Tokyo, or the Brent future back above $110.
The scenarios
Canadian September CPI (14:30): Reuters consensus 3.2% year on year, previous 3.0%, BoC priced at around 34% for a hike on 28 October
| If | Then |
|---|---|
| Stronger than expected (3.3% or higher) | Probability of a BoC hike ↑ from around 34% → Canadian short-term rates ↑ → CAD probably supported, USD/CAD towards 1.4143 (close of 25 September) → Sensitive pairs: USD/CAD, EUR/CAD |
| In line (3.2%) | BoC pricing little changed → USD/CAD driven by the dollar and the Brent future → Possible follow-through from the BoC surveys at around 16:30 |
| Weaker than expected (3.0% or lower) | Probability of a BoC hike ↓ → CAD probably weaker, especially if the Brent future stays below $110 → USD/CAD towards 1.4207-1.4262 (closes of 15 and 8 October) |
Paris time
Today's agenda
| Time | Event | Consensus | Précédent | FX sensitivity |
|---|---|---|---|---|
| 14:30 | Canada: September CPI (Statistics Canada) | 3.2% y/y (Reuters); 3.3% (ING) | 3.0% y/y | |
| 16:30 | Canada: BoC Business Outlook Survey (Q3) and Survey of Consumer Expectations, probable time | n/a | n/a |
Invalidation
What would change ourmind
Our reading, a dollar stripped of its October premium but not of its carry, would be called into question by:
- A US 2-year yield closing below 4.67%, its level of 17 September, the day after the Fed's hike: the dollar's decline would then change in nature.
- A stabilisation in the Nasdaq that took our dollar index back above 102.23, its close of 14 October, a sign that the inflation-front end logic is back in control.
- A probability of an October hike rising back above 30% on CME FedWatch during the blackout period, without any new data.
- EUR/USD below 1.1177, the 7 October low, on French fiscal risk, which would show that the dollar's retreat is not enough to lift the euro.
In short
What you need pick
The regime remains one of a dollar backed by a high front end, which the sell-off in AI stocks and Kevin Warsh's silence have relieved of its October premium. The dominant trade-off pits accelerating US inflation, with CPI at 3.7%, against a fear of AI that is driving purchases of duration and the franc. The main risk to our neutral stance would be this fear spreading to the 2-year yield, below 4.67%. Canada's CPI at 14:30 opens the week; Wednesday's UK CPI will show whether sterling is right to price in a BoE hike.
Taken at 08:27, Paris time
The markets in numbers
| Price | 1 session | 1 month | Since 31/12 | |
|---|---|---|---|---|
| Currencies | ||||
| EUR/USD | 1.1253 | +0.40% | −2.46% | −4.23% |
| USD/JPY | 158.02 | +0.03% | +1.92% | +0.86% |
| GBP/USD | 1.3335 | +0.67% | −0.90% | −0.97% |
| USD/CHF | 0.8240 | −0.75% | +0.60% | +3.95% |
| USD/CAD | 1.4161 | −0.32% | +1.59% | +3.42% |
| AUD/USD | 0.6959 | +0.69% | −2.43% | +4.12% |
| NZD/USD | 0.5664 | +1.13% | −1.71% | −1.76% |
| EUR/GBP | 0.8439 | −0.27% | −1.58% | −3.29% |
| Dollar index (Macro Edge calculation) | 101.71 | −0.39% | +2.04% | +3.53% |
| Rate | ||||
| US 2-year | 4.74 % | −3 bp | 0 bp | +127 bp |
| US 10-year | 5.09 % | −1 bp | +8 bp | +91 bp |
| Commodities | ||||
| Brent | 127.43 | +6.17% | +28.60% | +101.60% |
| WTI | 96.88 | −1.21% | +6.25% | +67.01% |
| 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. BLS, Consumer Price Index – September 2026 (USDL-26-1574), 2026-10-14.
- 2. Eurostat, Annual inflation up to 3.8% in the euro area, 2026-10-16.
- 3. Federal Reserve, FOMC statement, 2026-09-16.
- 4. RBNZ, OCR increased by 25 basis points to 2.75%, 2026-09-02.
- 5. Xinhua, China's GDP grows 4.5% in Q3, 2026-10-19.
- 6. Reuters via US News, Fed's Warsh Sees US Resilience, Mum on Rate-Path View, 2026-10-15.
- 7. PBS NewsHour, Fed chair Warsh says price stability is key but shies away from signals about rates, 2026-10-16.
- 8. Reuters via Business Recorder, Dollar set for weekly loss as Fed hike bets fade, 2026-10-16.
- 9. BNN Bloomberg, U.S. dollar heads for weekly fall as investors gauge AI sell-off impact, 2026-10-16.
- 10. BNN Bloomberg, Bank of Canada set for pair of important data drops ahead of live rate decision, 2026-10-16.
- 11. AP via Washington Post, How major US stock indexes fared Friday 10/16/2026, 2026-10-16.
- 12. AP via ClickOnDetroit, Asian shares are mixed with tech stocks volatile and oil falls on Trump's Russian sanctions waiver, 2026-10-19.
- 13. CNBC, Trump waives Russia-related sanctions, tariffs before they take effect, 2026-10-17.
- 14. Al Jazeera, Iran says two tankers catch fire after hitting mines in Strait of Hormuz, 2026-10-18.
- 15. straits.live, Daily brief, 2026-10-18.
- 16. Trading Economics, Yen Gains Amid Fresh Verbal Warning, 2026-10-15.
- 17. Japan Times / Bloomberg, BoJ leans against October rate hike, 2026-10-13.
- 18. Saxo, Asia Market Quick Take – October 19, 2026, 2026-10-19.
- 19. Trading News, Sterling tests the 100-day SMA as 54 of 63 economists expect a BoE hike, 2026-10-16.
- 20. Invezz, UK GDP grows 0.1% in August, beating forecasts, 2026-10-15.
- 21. ING THINK, FX Daily: Inflation versus AI overbuild story dominates, 2026-10-16.
- 22. ING THINK, THINK Ahead: AI-inflation tug of war, 2026-10-16.
- 23. Newsquawk, Week in focus, 2026-10-16.
- 24. Daybreak Wire, France budget vote and interest bill calendar, 2026-10-16.
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.
