On Thin Ice

October 23, 2026

Elias Haddad

Higher oil and tighter policy keep stocks vulnerable to further losses.

Flight to safety lifts USD, but JPY leads. US October PMI to test growth edge narrative.

Japan PMI held steady, UK beats, and EU disappoints.

Stocks stabilized after yesterday’s tech sell off. Rising crude oil prices and major central banks on a tightening path leave equity markets vulnerable to further losses. Treasuries are holding onto yesterday’s big rally, with the 10-year yield under 5%.

USD is firmer against most currencies ahead of the US October S&P Global PMI readings (2:45pm London, 9:45am New York). Indication the US retains its growth edge should reinforce USD support. Signs this advantage is fading can temper USD gains fueled by safe haven demand and the terms of trade boost from higher energy prices.

JAPAN

JPY leads gains, underscoring its status as the ultimate refuge currency. Japan September CPI and October PMI back additional BOJ hikes. Both headline and core ex. fresh food CPI rose to a nine-month high of 2.1% y/y, matching consensus, vs. 1.9% and 1.7% in August, respectively. Core CPI ex. fresh food & energy inflation was hotter at 2.4% y/y (consensus: 2.3%) vs.1.9% in August.

Meanwhile, the October composite PMI held at 52.3, consistent with resilient private sector growth. Faster services activity offset slower manufacturing expansion.

Nonetheless, the BOJ is unlikely to crank up the pace of tightening with headline and core CPI inflation tracking below its 2026 projection of 2.5%. The swaps curve price in just 2% odds of a 25bps BOJ rate hike to 1.50% on October 30, and 80% probability of a hike on December 18.

That leaves USD/JPY likely to trade within a 155.00-160.00 range in the near term. A deeper rout in the AI trade, can fuel more safe haven demand for JPY and drive the cross below 155.00.

EUROZONE

EUR/USD is on the defensive under 1.1200. The Eurozone October PMI was weaker than anticipated, but still indicative of robust growth. The composite PMI fell to a four-month low at 51.9 (consensus: 52.7) vs. 53.1 in September. The details showed both services and manufacturing activity slowed, with French private sector output moving back into contraction.

Above target Eurozone inflation and a resilient growth outlook give the ECB scope to deliver additional hikes. The swaps curve implies nearly 75bps of tightening to 3.25% in the next twelve months. That limits policy divergence with the Fed and the drag on EUR/USD. However, France’s fiscal troubles can drive EUR/USD down to 1.1000 (details here).

GBP/USD is down on broad USD strength while EUR/GBP dropped to its lowest level since May 2025. UK October PMI beat expectations, cementing bets on a 25bps BOE policy rate hike to 4.00% on November 5. The composite PMI improved to an eight-month high at 53.1 (consensus: 51.7) vs. 52.0 in September, driven by faster services and manufacturing growth.

Over the next twelve months, the swaps curve still implies over 100bps of BOE tightening. We see scope for less which is a headwind for GBP: (i) The UK economy is operating below capacity, (ii) virtually no real wage growth constrains spending, (iii) the policy rate is near the top of the BOE’s estimated 2% to 4% neutral range, and (iv) fiscal policy will likely turn more restrictive following the October 28 UK budget.

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