US Dollar Weakens Despite Rising Inflation as Sterling Gains & Euro Faces French Pressure
Summary
US annual inflation increased to 3.7% in September, while producer prices recorded their largest monthly rise since March 2022.
The US dollar weakened on Friday as Treasury yields declined, despite stronger inflation figures earlier in the week.
Sterling reached a three-week high against the dollar, while political unrest in France added renewed pressure to the euro.
Euro area inflation reached 3.8% in September, while oil prices fell in early Monday trading following changes to US sanctions policy towards Russia.
US inflation accelerated in September, with consumer prices rising 3.7% annually from 3.4% in August. Monthly inflation reached 0.6%, driven largely by a 9.1% increase in gasoline prices. Producer prices also climbed 1.3% during the month, their largest increase since March 2022. Despite these figures, the dollar index fell 0.26% on Friday as declining Treasury yields weighed on the currency. By early Monday trading, the index was broadly unchanged, with markets pricing an 84% probability that the Federal Reserve would leave interest rates unchanged at its October meeting.
Sterling strengthened against both the dollar and euro during Friday's trading, reaching its highest level against the dollar in more than three weeks. UK GDP figures released on Thursday showed the economy expanded 0.1% in August and 0.7% over the three months to August. The pound was also heading towards a third consecutive weekly gain against the euro, supported by relative confidence in the UK's economic outlook. Markets continued to anticipate a 25-basis-point Bank of England rate increase in November, although Governor Andrew Bailey cautioned that the wider inflationary effects of higher energy prices remained uncertain.
The euro faced renewed pressure as France's fiscal difficulties were compounded by political unrest over the weekend. President Emmanuel Macron condemned violent demonstrations over the rising cost of living, with the euro declining in early Monday trading. Meanwhile, Eurostat confirmed annual euro area inflation at 3.8% in September, up from 3.2% in August. Energy made the largest contribution to inflation, while higher government borrowing costs remained a concern across European bond markets.
Geopolitical developments continued to influence financial markets, particularly energy prices. Brent crude fell approximately 1.7% in early Monday trading following the US decision to waive certain sanctions and tariffs on Russia. President Donald Trump subsequently indicated that a final decision remained outstanding, while Secretary of State Marco Rubio said the administration would assess the economic implications over a period of up to 60 days. The announcement followed a volatile week in oil markets, with continued attacks on commercial shipping and concerns over Middle Eastern supply disruptions keeping prices elevated.
Events to Watch This Week:
Tuesday 20 October: UK employment, unemployment and average earnings data.
Wednesday 21 October: UK Consumer Price Index and public sector finances for September.
Friday 23 October: UK retail sales and October flash manufacturing and services PMI readings for the UK, euro area and United States.
This week's UK economic releases will provide further insight into inflation and labour market conditions ahead of the Bank of England's November meeting. Friday's PMI figures will also offer an updated assessment of business activity across the major currency regions, with Federal Reserve and European Central Bank interest rate decisions scheduled for the following week.
Speak to the Orbis dealing team ahead of this week's key releases to discuss your upcoming currency requirements.
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