The USD’s three-week rally is running out of monetary-policy fuel. Senior Fed officials have pushed back against expectations for a back-to-back hike at the October 28 FOMC meeting. After softer US PCE inflation and nonfarm payrolls data, another concern is emerging. Financial conditions tightened rapidly since the September 16 Fed hike. Since end-June, the rise in the 30-year mortgage rate has overtaken the increase in the 10-year Treasury yield.



Attention could therefore rotate back towards the more uncomfortable reason long-dated Treasury yields are approaching pre-Global Financial Crisis highs. This distinction matters for the USD.

Higher yields driven by Fed tightening can support the USD. Higher term premia driven by concerns over debt supply, fiscal sustainability, and Treasury-market credibility need not. US Treasury Secretary Scott Bessent’s renewed willingness to intervene alongside Japan to stabilize the JPY without adding selling pressure to Treasuries illustrates that tension.

However, USD/JPY has been trapped over the past fortnight, capped by intervention fears around 159-160 and supported around 156.50 by yield differentials favouring the Fed over the Bank of Japan.

The November 3 US midterm elections add another constraint. President Donald Trump and his administration face voter backlash over rising living costs. Tariffs and the Iran conflict have driven up grocery and fuel prices, while households are also confronting higher mortgage and other borrowing rates amid weak real wage growth.



The energy price shock also migrated downstream. WTI crude oil prices have not revisited April’s peak, but energy prices that matter more directly to US households and businesses have not followed crude lower. Gasoline has returned towards its 2026 high, while diesel has surged to new highs amid exceptionally tight distillate supplies.

That divergence helps explain President Trump’s pressure for coordinated G7 action to front-load diesel, alongside its coordinated release of 100 million barrels of emergency crude and fuel stocks. It weakens the argument that US energy self-sufficiency leaves the US economy substantially insulated from global fuel-price shocks.

If Republicans lose control of the House, markets could also reassess the US exceptionalism narrative that supported the USD after its post-Liberation Day sell-off.

Friday’s post-NFP USD sell-off exposed a less uniform FX market than the DXY decline suggested.

CHF behaved like a haven again, balancing concerns surrounding both the USD and its “anti-USD,” the EUR. Softer US inflation and payrolls coincided with France’s sovereign debt concerns. EUR/CHF declined for a third consecutive week as widening French OAT-Bund spreads outweighed the Swiss National Bank’s decision to buck the global tightening cycle and to temper its CHF intervention rhetoric. USD/CHF’s retreat from its pivotal 0.84 resistance level leaves scope for consolidation around 0.82-0.84.

GBP’s resilience told a different story. It looked more like a repricing of Fed hike expectations after the US payrolls report. Markets continue to distinguish the UK’s difficult fiscal challenge from France’s sovereign-debt stress. Despite elevated gilt yields, investors do not expect the October 28 UK Autumn Budget to reprise the 2022 mini-budget crisis. Fiscal discipline remains anchored by Chancellor John Healey’s pledge to adhere to the fiscal rules and scrutiny by the Office for Budget Responsibility (OBR). The Bank of England’s September 17 decision to pause gilt-sale auctions until April 2027 also reduced a potential source of pressure at the long-end. 

EUR/USD’s four-week decline reflected a changing balance of risks on both sides of the Atlantic. First, the Fed’s return to tightening and market expectations of further Fed hikes eclipsed the European Central Bank’s own tightening story. As rising US Treasury yields lifted French OAT yields faster than Germany Bund yields, France’s fiscal problems also eclipsed America’s.

But markets should be careful about extrapolating France’s fiscal difficulties into another euro-area sovereign debt crisis. The widening OAT-Bund spread reflected a repricing of a known French fiscal problem that requires a credible response from Paris. This differs from the 2012 crisis when Greece’s fiscal revelations triggered a “who’s next?” loss of confidence across peripheral Europe. The ECB has stronger institutional firewalls today, including the Transmission Protection Instrument (TPI) to address country-specific stress that threatens monetary policy transmission.

Quote of the Day
“Patience is not simply the ability to wait - it's how we behave while we're waiting.”
     Joyce Meyer

Today in history
The Italian lira was devalued by approximately 41% on October 5, 1936, aligning the currency with the US dollar and British pound.