Forex week in review 42/2026: hot US inflation, and the dollar still ends lower

Every trader learns that a hotter-than-expected inflation number should be good for the currency, because it raises the chance of higher interest rates. This week the US produced exactly that, and the dollar did rally, briefly. Within 24 hours the gain had gone, and by Friday the dollar index was 0.36% lower on the week. Understanding why is one of the more useful lessons this year has offered.

Weekly figures below compare the Friday 16 October close with the Friday 9 October close, as reported by RTTNews. Intraday levels and yields are from CNBC and Reuters reporting; inflation figures are from the Bureau of Labor Statistics.

Where we left off

The previous two weeks had been dominated by the bond market. US 10-year yields touched 5.35% on 7 October, their highest since 2002. The euro hit a 17-month low on French and Spanish political worries. Fed minutes showed most officials expected another hike by year end, but pricing for an October move had dropped below 20% after a weak September jobs report. Gold had bounced from a two-month low. See last week’s recap for the detail.

So the September CPI report, due on Wednesday, was the obvious event of the week. Bybit’s Han Tan had told CNBC the release could be the catalyst for gold’s next big move.

Day by day

Monday 12 and Tuesday 13 October

The week started with the dollar slightly firmer, extending the previous week’s gains, according to RTTNews. Markets were mostly waiting for Wednesday.

Wednesday 14 October: CPI comes in hot

At 8:30 am New York time, the BLS reported that the consumer price index rose 0.6% in September on a seasonally adjusted basis, and 3.7% over the past 12 months, up from 3.4% in August. Consensus had been 3.6%, according to Investing.com. Core CPI, which excludes food and energy, rose 0.3% on the month against a 0.2% forecast, and 2.6% on the year against a 2.5% forecast.

The detail showed where the pressure was coming from. Energy prices rose 5.2% in the month and 20.4% over the year. Gasoline rose 9.1% in the month and 34.2% over the year. That is the energy shock from the Middle East conflict feeding straight into consumer prices.

The first reaction was what the textbook says. The dollar index rose to an 18-month high, according to CNBC. The euro fell to an 18-month low and sterling to a 13-month low. Market pricing for an October Fed hike jumped to around 50%, according to CNBC.

Thursday 15 October: the reversal

By the Asian session on Thursday, most of those gains were gone. CNBC reported the dollar index at 102.06, EUR/USD at 1.1187, up 0.3% from its 18-month low, and GBP/USD at 1.3224, up 0.2% from its 13-month low. USD/JPY was at 157.82.

Three things turned it around. First, Fed Vice Chair for Supervision Michelle Bowman and San Francisco Fed president Mary Daly both said the Fed could wait for a clearer picture before its 27–28 October meeting. Second, Treasury yields fell: the 10-year dropped to a three-week low of about 5.13%. Third, the market decided the number was not hot enough to change the Fed’s plans. Khoon Goh of ANZ told CNBC that markets seemed to have concluded the CPI print was not hot enough to force the Fed’s hand for October, and noted that the meeting falls just days before the US midterm elections. Sim Moh Siong of OCBC said the dollar rally lacked punch as the retreat in Treasury yields after an initial jump softened the rates impulse.

The Australian dollar went the other way. September employment data showed an unexpected fall, and AUD/USD dropped about 0.3% to around 0.6952, according to CNBC.

Later on Thursday, US producer prices rose by the most in four and a half years, according to CNBC and Reuters, and retail sales for September were also released. Neither changed the direction of the day.

Friday 16 October: Fed voices diverge

Fed chair Kevin Warsh sounded upbeat on the economy but gave no signal on the rate path, according to CNBC. Chicago Fed president Austan Goolsbee called the inflation data discouraging. Cleveland Fed president Beth Hammack said the Fed might need to hike more aggressively if the public’s inflation expectations deteriorated notably. CME FedWatch showed traders largely expecting a hold in October but pricing about a 90% chance of a December hike.

In the Gulf, two tankers were attacked off Saudi Arabia, according to the UK Maritime Trade Operations agency as reported by CNBC. Spot gold ended the day around $4,175 an ounce, up 0.1% on the day but down about 0.4% on the week.

The energy shock in the numbers

It is worth pausing on how much of this inflation is energy. Over the 12 months to September, US energy prices rose 20.4% and gasoline 34.2%, according to the BLS, while core prices rose 2.6%. In other words, a household that drives a lot is living through a very different inflation rate from one that does not. For central banks this creates a dilemma. If they treat the energy spike as temporary and do nothing, they risk higher prices spreading into wages and services. If they hike hard, they slow an economy that is already paying more for fuel.

That dilemma is why the market reacted so cautiously to a hot headline number. It is also why oil prices, and news from the Gulf, have become as important to currency traders this year as the data calendar. A tanker attack or a refinery outage can change inflation expectations, and therefore rate expectations, before any official statistic is published. Our guide to central banks and interest rates explains how rate expectations feed into currency prices.

Pair by pair

EUR/USD: up 0.34%

The euro closed at 1.1240, up from 1.1202. That headline hides a lot: it fell to an 18-month low after the CPI release on Wednesday and then recovered strongly. The French and Spanish worries that drove last week’s fall had not gone away, but they had not got worse either, and once US yields started falling the euro had room to recover.

GBP/USD: up 0.71%, the best performer

Sterling was the strongest of the majors here, rising from 1.3235 to 1.3329 despite touching a 13-month low on Wednesday. Part of that is simply the dollar reversal. Part of it is relative: UK markets had already been pricing a Bank of England hike in November, so a smaller dollar yield advantage helped the pound more than most. Two weeks of a flat GBP/USD followed by a 0.7% gain, while the euro moved less, meant EUR/GBP continued to drift lower.

USD/JPY: down 0.21%

USD/JPY eased from 158.34 to 158.01. It is the pair most sensitive to US yields, and when the 10-year fell to a three-week low on Thursday, it followed. The move was small compared with the shift in Fed pricing, which reflects how wide the interest-rate gap between the US and Japan remains even after this week.

AUD/USD: down 0.54%, the weakest

The Australian dollar was the only major in this group to lose ground on the dollar, falling from 0.6985 to 0.6947. The trigger was domestic: September employment unexpectedly fell. A risk-sensitive currency with a weak data print and a cautious global mood is a combination that tends to underperform. It is a reminder that the dollar is only one side of every pair; the other side has its own data.

Gold: down about 0.4%

Gold swung around the CPI release, firmed as yields and the dollar eased on Thursday, and finished slightly lower on the week, around $4,175 an ounce. CNBC quoted Bart Melek of TD Securities saying gold was very much range-bound and tilting toward the lower bound of support.

Why the dollar fell on hot inflation

This is the week’s main lesson, and it has several parts.

1. The size of the surprise mattered more than the direction

Headline CPI beat the forecast by 0.1 percentage point. Core beat by 0.1 point. That is a surprise, but a small one. The market had already priced a high chance of a hike by December. What it needed to decide was whether the Fed would move sooner, in October. A 0.1-point miss was enough to raise the odds for a few hours but not enough to convince traders, especially once Fed officials said they could wait. Our guide on how economic data moves forex explains why the gap between actual and expected matters more than the number itself.

2. Headline and core told different stories

Headline inflation of 3.7% looks alarming. But core inflation was 2.6%, and much of the gap came from gasoline, up 34.2% on the year. Central banks tend to look through energy shocks if they believe the effect will fade, and focus on core inflation to judge whether price pressures are spreading. That made it easier for officials like Bowman and Daly to argue for patience.

3. Fed speakers can override data

Within hours of the release, two senior officials signalled they were in no hurry. Markets care about what the people who set rates think about the data, not just the data. That is why the economic calendar should include scheduled speeches as well as releases.

4. Yields fell, and currencies follow yields

The 10-year yield fell to a three-week low on Thursday. When yields fall, the extra return from holding dollars shrinks and the dollar usually weakens. OCBC’s comment that the retreat in yields softened the rates impulse is a neat summary.

5. Positioning

The dollar index had risen for several weeks running. When a market has moved a long way in one direction, many traders already hold the position, and a piece of good news can trigger profit-taking instead of fresh buying. This is the old idea of “buy the rumour, sell the fact”. It is not a rule, but it is common enough to be worth knowing.

Trading around a big release

The CPI release is one of the most volatile moments of the month. A few practical points:

• Spreads widen in the seconds around the release because liquidity providers pull their quotes. See spreads and commissions.
• Fills on market and stop orders can be several pips away from the price you see, especially in the first minute. See slippage explained.
• The first move is not always the real move. Wednesday’s dollar rally was gone by Thursday morning in Asia.
• If you hold a position into the release, size it for the volatility. Our position sizing guide shows how.

Example: a trader buys one mini lot (0.10) of USD/JPY at 158.00 just before the CPI release, with a stop at 157.50, a risk of 50 pips. On a 0.10 lot of USD/JPY, a pip is worth roughly ¥100, a little over $0.60 at these rates, so the planned risk is about $32. If the release triggers a fast spike lower and the stop fills 10 pips worse at 157.40, the loss is about $38. That 20% overshoot is the cost of trading through news. On a larger position or with full leverage, the same overshoot could be far more damaging. The numbers are illustrative.

Remember that leverage magnifies both gains and losses. EU retail clients are limited to 30:1 on major pairs under ESMA rules, and most retail CFD accounts lose money; brokers typically disclose figures between 61% and 89%. Our guide on leverage and margin shows how quickly a leveraged position can use up margin on a volatile day.

What this week teaches

• A data beat does not guarantee a currency rally. What matters is whether the surprise changes the expected path of rates, and by how much.
• Watch core inflation as well as headline. Energy-driven inflation may not move a central bank as much as broad-based price rises.
• Central bank speakers can undo the reaction to data within hours.
• The first reaction to a release is often not the lasting one.
• Every pair has two sides. AUD/USD fell on Australian data even as the US dollar weakened.
• Trading through major releases means wider spreads and possible slippage. Plan for it.

Scheduled next week

These are the scheduled events for Monday 19 to Friday 23 October. This is a list of events, not a view on how markets will react.

• Monday 19 October: remarks by RBA Assistant Governor Christopher Kent.
• Tuesday 20 October: UK labour market statistics from the Office for National Statistics.
• Wednesday 21 October: UK consumer price inflation for September from the ONS.
• Thursday 22 October: remarks by RBA Deputy Governor Andrew Hauser; US weekly initial jobless claims.
• Throughout the week: developments in the Gulf after Friday’s tanker attacks. The Fed’s usual pre-meeting quiet period ahead of the 27–28 October FOMC limits public comments from officials.

Sources

• US Bureau of Labor Statistics: Consumer Price Index, September 2026
• Investing.com: US CPI year on year, release history
• CNBC: Dollar falls from 18-month high despite hot CPI as Fed curb hike bets
• CNBC: Gold set for a weekly drop as traders assess Fed signals
• RTTNews: Dollar rises amidst inflation focus, haven demand (week to 9 October closes)
• RTTNews: Dollar index edged down last week (week to 16 October closes)
• Mitrade: US September CPI recap
• CNBC: Brent oil tops $109 after Houthi militants claim attacks on Saudi airports and Aramco facilities