As core inflation has surpassed expectations, recent data from the United States suggests that inflationary pressures extend beyond the costs associated with the energy sector.
This is demonstrated by the Federal Reserve’s preferred inflation gauge, which indicates that the Personal Consumption Expenditures (PCE) Index remains elevated, approaching 3 percent.
The Federal Reserve may choose to consider a more comprehensive economic perspective rather than focusing solely on individual data points.
This could imply that the Federal Reserve may refrain from implementing policy changes in October.
However, if inflation rates remain high, an increase in interest rates might occur in December.
Notably, recent statements from Federal Reserve officials have downplayed the urgency for rate hikes.
Two noteworthy observations include the robustness of US economic growth and the persistent inflationary pressures that are presenting challenges for the Federal Reserve, negatively impacting the overall financial sector. Such heightened inflation rates have contributed to a sell-off in the artificial intelligence (AI) sector within the US equity market.
Meanwhile, the yield on 10-year US Treasury bonds, which has been under significant pressure over the past three weeks, that rose to a record 5.36 percent as investors seek improved returns has corrected.
Despite higher inflation, the 10-year bond yield recovered last week to approximately 5.04 percent before stabilizing to close around 5.098 percent.
This pullback may represent a corrective phase, reflecting a flight to safety as investors moved away from equities amid mounting pressure and reallocated their portfolios towards US bonds.
Furthermore, it is important to take note of the comments made by Federal Reserve Chairman Kevin Warsh at a recent event in Bangkok.
Despite the ongoing inflationary pressures, he did not indicate a likelihood of a rate hike during the upcoming October Federal Open Market Committee (FOMC) meeting scheduled for the last week of the month. Nevertheless, this does not imply a shift towards a dovish stance.
After the robust inflation report, the likelihood of an interest rate increase jumped from 27 percent to 45 percent, but fell back to 16 percent after the speech.
This shift in expectations has contributed to a significant depreciation of the US dollar against major currencies. The US Dollar Index (DXY), which had been above 102, closed around 101.69 on Friday, offering a degree of stability to US stocks that have ended in the red, while also positively impacting bond yields.
Conversely, concerns regarding oil prices are escalating. Last week, in my post, I noted the potential for Brent crude oil to reach the $108 to $110 range. Brent crude closed at $109.69, raising alarms regarding its implications for inflation and the economic viability of oil importing nations.
It is imperative that oil prices decrease below the $105 threshold, as continued elevated prices could significantly impact the Federal Reserve’s decision-making in October and hinder potential declines in Treasury yields.
The rally in oil prices is attributed to supply disruption concerns arising from geopolitical tensions in the Middle East and Russia. At present, oil serves as a key factor impacting fluctuations in global markets.
Should the prevailing trend in oil prices persist, the Federal Reserve may reconsider its strategy for interest rate adjustments in October, compelling global financial markets to re-evaluate their fiscal and monetary policy outlook.
One point to think about is the unusual situation where inflation is going up while the US dollar is losing value. I have reservations regarding the sustainability of the current weak dollar sentiment unless oil prices decline.
Both Europe and Japan are expected to face challenges due to rising oil prices, considering their economic vulnerability.
Moreover, developing nations that depend significantly on oil imports will encounter intensified challenges as a result of rising oil prices.
Increased oil prices will place the European Central Bank in an uncertain position, primarily due to the heightened energy import costs that adversely affect both trade and the purchasing power of households.
As a result, those in policymaking positions are confronted with a tough choice between controlling inflation and promoting stronger growth, which is already quite vulnerable.
Furthermore, the fiscal and bond market distress in France introduces an additional risk premium for the euro.
In particular, the weaknesses linked to French financial risks greatly weaken the stability of the European currency.
Meanwhile, the Japanese yen exhibits greater vulnerability to rising oil prices, as it cannot withstand the dual pressures of elevated oil prices and increasing US bond yields.
The escalation of oil costs expands Japan’s oil import expenditures, consequently straining the trade balance.
A declining yen worsens this scenario, making oil pricier in local currency and ultimately pushing domestic inflation higher.
For the United Kingdom, a critical inquiry is whether the economy can effectively absorb higher oil prices. The Bank of England has already indicated that rising oil prices will influence energy costs, potentially necessitating an increase in interest rates to restore inflation to the target level of 2 percent, suggesting that the UK may not be able to accommodate high oil prices without adverse effects.
The Pound Sterling has strengthened, supported by growth in the UK that exceeded expectations. While concerns surrounding French bonds continue to exert downward pressure on the euro.
While the Sterling benefits from a favourable interest rate, this is dependent on the current circumstances. Should oil prices escalate, necessitating a rate hike in the UK, there is a risk that economic growth may be hindered, thereby limiting further appreciation of the Pound Sterling.
Furthermore, gold is currently affected by mixed factors. Ongoing inflation increases the desire for gold as a hedge.However, a stronger US dollar along with high interest rates puts a lot of pressure on its value.
These dual factors are expected to continue driving gold prices in the forthcoming week.
Nevertheless, I remain cautious.
Given the current situation of elevated oil prices that demand a greater amount of US dollars for purchase, the opportunity for gold to uphold its status as a safe haven appears limited, and selling pressure is anticipated to emerge during price upticks. While central banks’ purchases may lend some support to oil prices, their ability to acquire gold will depend on their liquidity position.
WEEKLY OUTLOOK - Oct 19-23
#GOLD @ $4165.50- Gold needs to surpass $4240 in order to hit $4298. The risk is that if it drops below $4050, it might test $4070.
#EURO @ 1.1239- It must rise above 1.1320 to reach 1.1375. However, a drop below 1.1170 will prompt a move towards 1.1105.
#GBP @ 1.3329- Pound Sterling needs to rise above 1.3395 for 1.3420. If it drops below 1.3250, it will likely lead to further losses. Otherwise, the GBP will remain within that range.
#JPY @ 157.99- The $/JPY pair could have a challenging week protecting the levels of 158.97 or 159.60. Nevertheless, if it drops below 156.50, the likelihood of reaching 155.70 will rise.
Copyright Business Recorder, 2026
The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper
He tweets @asadcmka
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