- USD retains upper hand backed by hawkish Fed. USD risk from a tech selloff warrant closer look.
- Data to test rate hike bets across the rest of G10.
- IDR slide argues for a Bank Indonesia hike.
The dollar index (DXY) rallied last week to its highest level since early April 2025, when President Donald Trump unveiled his Liberation Day tariffs. The hot US October CPI print and hawkish Fed rhetoric, fueled expectations for further fed funds rate hikes, lifting USD and triggering a Treasury selloff that dragged global bonds lower.
The USD rally may look stretched in the near-term as tightening by other major central banks limits policy divergence with the Fed. But robust US growth, favorable labor market conditions and sticky underlying inflation keep USD bias tilted higher.
US October retail sales (Tuesday), FOMC October meeting minutes (Wednesday) and September Treasury International Capital (TIC) (Wednesday) are in focus this week. Geopolitics will also take the spotlight. President Donald Trump, Russian President Vladimir Putin and Chinese leader Xi Jinping are due to meet in Shenzhen on Thursday to discuss nuclear non-proliferation.
Across the Rest of the G10…
Inflation, wages, and activity data will test the scope for more central bank rate hikes.
Canada October CPI (Monday). Headline CPI is seen at 3.2% y/y vs. 3.1% in September, against the Bank of Canada (BOC) Q4 forecast of 3.4%. An upside surprise would strengthen bets on another 25bps hike to 2.75% on December 9 (60% priced in) and offer CAD support.
Core measures should paint a mixed picture. Core CPI ex. food & energy is expected to ease to 2.0% y/y vs. 2.1% in September, while the average of CPI trim and median is expected to rise to 1.95% y/y vs 1.85% in September.
In the UK, a resilient labor market and elevated price pressures should keep 100bps of Bank of England (BOE) hikes in play over the next year despite downside risk to consumer spending. GBP has limited downside against USD, with support around 1.3150, and more room to gain versus EUR.
UK September labor market (Tuesday). The BOE projects underlying employment growth of 0.2% in the three months to October, and the unemployment rate unchanged at 4.7% in the three months to September. Private sector regular pay growth is expected to rise to 3.1% y/y vs. 3.0% in September, matching the BOE’s Q3 forecast.
UK October CPI (Wednesday). Headline CPI is forecast to rise to 3.6% y/y (BOE projection: 3.7%) vs. 3.5% in September, core CPI is seen at 2.8% y/y for a second straight month, and services CPI is projected to increase to 3.8% y/y (BOE projection: 3.9%) vs. 3.7% in September.
UK October retail sales (Friday). Risk to retail sales is skewed to the downside because of declining real household income. Retail sales excluding auto fuel are expected at 0.1% m/m vs. -0.7% in September.
Eurozone Q3 negotiated wages (Friday). Negotiated wages are expected to rise to 2.6% y/y vs. 2.44% in Q2. Still, the ECB’s negotiated wage tracker points to easing wage pressures. That limits the room for further hawkish ECB repricing (roughly 75bps in the next twelve months) and is a headwind for EUR.
In Japan, soft economic activity and inflation broadly tracking the Bank of Japan’s (BOJ) projection should continue to favor a gradual tightening cycle. That will keep the US-Japan yield gap supportive of USD/JPY. But intervention risk makes chasing gains beyond 160.00 a less attractive risk-reward trade.
Japan Q3 GDP (Sunday). Real GDP growth is projected at 0.1% q/q vs. 0.4% in Q2 as household and net exports weigh on activity. Business investment should be the main growth driver, supported by government measures and accommodative financial conditions.
Japan October CPI (Thursday). Headline CPI is expected to rise to near a one year high at 2.5% y/y vs. 1.9% in September, driven by higher energy costs and a weak yen. Core CPI ex. fresh food is forecast to rise to 2.3% y/y vs. 2.1% in September, the highest since December 2025 but below the BOJ’s fiscal 2026 forecast of 2.5%. Excluding fresh food & energy, inflation is seen easing to 2.3% y/y vs. 2.4% in September, close to the BOJ’s fiscal 2026 projection of 2.4%.
In Australia, wages growth and the labor force survey will test the RBA’s November dovish hike. RBA cash rate futures price in 50% odds of a 25bps cut over the next twelve months. As such, stronger wages and/or jobs data would temper rate cut bets and underpin AUD.
RBA Minutes of the November meeting (Tuesday). At that meeting the RBA delivered on expectations and raised rates 25bps to 4.85%. However, the scrapping of reference from September about increasing the cash rate target further if needed, alongside a 6-3 vote to hike, with the three dissents favoring a hold, point to a pause in the tightening cycle.
Australia Q3 wage price index (Wednesday). Wage growth is expected to rise 1.0% q/q vs. 0.8% in Q2 and quicken at an annual pace of 3.4% vs. 3.2% in Q2, in part reflecting the recent Fair Work Commission (FWC) decision to increase all modern award wages by 4.75%. The RBA anticipates wage growth to moderate from mid-2027 onwards.
Australia October labor force (Friday). The economy is forecast to add +25k jobs vs. -39.3k in September and the unemployment rate is seen unchanged at 4.7% for a third straight month, matching the RBA’s December projection.
…And Beyond
National Bank of Hungary (MNB) policy decision (Tuesday). MNB is widely expected to keep rates on hold at 5.50% for a third straight meeting. The bank can afford to stand pat as inflation remains near the bottom of its 2-4% tolerance band.
Bank Indonesia (BI) policy decision (Wednesday). BI is expected to keep rates on hold at 5.75% for a fifth straight meeting. But it’s a close call as 40% of economists surveyed by Bloomberg have a 25bps increase penciled in. We lean towards a hike to shore up the rupiah after USD/IDR hit a record high last week.
South African Reserve Bank (SARB) policy decision (Thursday). SARB is expected to hold the policy rate at 7.25% after September’s 25bps hike. However, inflation above the bank’s 2-4% tolerance band keeps further hikes in play.
Dollar vulnerability to an AI Sell Off
A common market narrative is that an AI-led equity market sell-off can send the dollar lower.
There is a legit bearish USD argument. Foreign private investors have accumulated a record amount of US equities equivalent to $844bn in the twelve months to August, which has essentially funded the entire US trade deficit. If confidence in AI returns deteriorates, investors could sell US shares, repatriate the proceeds, or increase dollar hedges.
Meanwhile, a sharp decline in investment in the technology sector and the negative household wealth effect from lower equity valuation can erode the US growth advantage. According to the IMF, the combined effect is a large decrease in global activity, which is 1.1ppt lower than that in the baseline by 2028, with larger losses in the US (1.8ppt) and Asia excluding China (1.7ppt).
We are not convinced with these bearish USD arguments for three reasons:
First, selling an American stock does not require selling the dollar. An investor can sell a technology company and buy Treasuries. Or hold dollar cash. Or rotate into another US sector. Interestingly, the USD tends to move in tandem with net foreign purchases of US Treasuries and in the opposite direction to net foreign purchases of US equities. That challenges the view that weaker foreign demand for US stocks would automatically drag USD lower.
Second, an AI investment bust may erode the US growth edge less than feared. Recent analysis puts the boost to the level of US GDP from the data-center buildout, which is among the largest investment expansions in peacetime American history, at just 0.3%. The reason is that much of the equipment is imported.
A reversal would therefore cut imports alongside investment, cushioning the blow to US growth and spreading the pain to overseas suppliers. These include chip and server makers in Asia (Taiwan and South Korea) and Mexico, as well as equipment makers in Europe and Japan.
Third, if the global downturn leads to heightened risk aversion or an AI correction becomes a global financial shock, investors may need dollars to repay funding and meet margin calls. Dollar credit to non-bank borrowers outside the US stood at over 15 trillion in Q2. That’s a substantial source of potential funding demand during stress. That means the dollar could strengthen in the initial scramble for liquidity—even as US stocks fall.
