CAPITALDIGEST MARKET REVIEW, 12/10/2026
October 12, 2026
STERLING TICKS HIGHER AS DOLLAR DIPS ON LOWER OIL PRICES
The pound rose on Friday as the dollar dipped on the back of falling oil prices, with Britain’s currency set to end the week little changed against the US currency but higher versus the euro. Currency markets have been roiled over the last two weeks by sharp rises in bond yields around the world, driven by rising energy prices. The euro has particularly suffered as French bond yields have surged, exacerbated by concerns about the country’s budget deficit, while the search for safe havens has boosted the dollar. Yet a fall in oil prices helped pull global bond yields away from multi-decade highs and relieved the pressure on currencies, with the dollar dipping. Sterling was last up 0.1% at $1.324. It fell to $1.3184 on Thursday as the dollar strengthened, around its lowest since late June. The pound was little changed against the euro , with the single currency fetching 84.74 pence. Sterling was set for its second weekly gain against the euro, however, after rallying sharply last week and hitting its highest since June 2025 on Wednesday at 84.49 pence per euro. Brent crude oil was down 1% to $103.30 a barrel after US President Donald Trump said the country will not attack Iran before the US elections next month and said there had been productive talks with Tehran over the war. Investment bank ING said the dollar could remain strong as energy prices support the case for further Federal Reserve interest rate hikes, keeping other currencies under pressure. “We don’t see signs of a broader US dollar correction brewing,” said Francesco Pesole, currency strategist at ING. “The oil market is reluctant to price out the geopolitical premium that has kept prices above $100 a barrel despite improved Gulf supply.”
EURO FALLS, SET FOR FIFTH STRAIGHT WEEKLY DROP AS OIL PRICES RISE
The euro was poised for a fifth straight weekly drop on Friday, with early gains fading as oil prices erased earlier declines, but recent selling pressure was muted as France’s beleaguered bond market steadied. The euro zone’s currency hit a 17-month low of $1.1161 on Monday as investors worried about France’s record public debt and the difficult political path to budget cuts, in contrast with a robust-looking US economy and currency. The dollar index , which measures the greenback against a basket of currencies, rose 0.13% to 102.25. The index was up about 0.3% on the week and on track for a fourth straight weekly gain, its longest run since May 2025. The euro was last down 0.1% at $1.1198, and off about 0.5% on the week as it was poised for its longest streak of weekly declines against the dollar since the start of 2025. Risk premiums on French and Italian government debt were on track for a weekly decline after jumping in late September, as investors looked for fresh developments before demanding higher compensation for fiscal and political risks. Global bond markets had calmed earlier on Friday as oil prices fell after US President Donald Trump said that the US would not attack Iran before US midterm elections on November 3 and added that there had been productive talks with Tehran over the war. “As it stands right now, you have a confluence of factors — you have higher oil prices, you have the issue in France, so it is really tough to say what is moving the market more than the other,” said Eugene Epstein, head of trading and structured products at Moneycorp in Stamford, Connecticut. “But practically speaking, I’d say today is in a relative holding pattern, everyone is just waiting for all the Fed speak to make its way through, because certainly you can see that the sensitivity of the dollar is high to the entire range of Fed speakers now,” Epstein said. Crude prices moved off their lows, however, as British navy-affiliated agency UKMTO said a vessel was struck by an unknown projectile 13 nautical miles west of Al Jazeera in the United Arab Emirates. US crude rose 0.6% to $92.04 a barrel after falling as low as $90.01 and Brent advanced to $104.88 per barrel, up 0.58% on the day, after declining to $102.33. Bond yields around the world have climbed in recent weeks due to expectations of central bank rate hikes as well as concerns about government finances. But expectations for a rate hike from the Fed at its policy meeting later this month remain subdued, with markets pricing in a 19.4% chance for a rate hike of at least 25 basis points, according to CME FedWatch, opens new tab, even as recent economic data has pointed to persistent inflation pressure. However, investors are pricing in an 85.8% chance for a hike at the central bank’s December meeting. On Friday, the University of Michigan’s Surveys of Consumers showed US consumer sentiment slumped further in early October as the rising cost of living because of the Middle East conflict soured households’ views of the economy. While many Fed officials have indicated more rate hikes will be needed to curb inflation, others have pushed back on the need for immediate hikes, and suggested the Fed should be patient and flexible in deciding the rate path. French debt has been under pressure as politicians struggle to curb the budget deficit ahead of a divisive election in 2027. The calling of a snap election in Spain earlier in the week also added to the pressure on the euro. Sterling gained 0.08% to $1.3235 but was on track for a seventh straight week of declines, its longest stretch since November 2024. Against the yen , the dollar strengthened 0.25% to 158.25. The Japanese currency was on pace for its fourth straight weekly decline against the greenback, down about 0.2% on the week.
DOLLAR STAYS NEAR 18-MONTH HIGH AS MIDEAST CONFLICT, INFLATION DATA IN FOCUS
The dollar held ground near its strongest level in a year and a half in early Asian trade on Monday as an escalating Middle East conflict kept investors wary ahead of key US inflation data later this week that will influence monetary policy. Oil prices swung between gains and losses after Yemen’s Iran-backed Houthis stepped up strikes on Saudi Arabia while two tankers were attacked over the weekend. Prices were also influenced by Sunday’s announcement from US President Donald Trump about an energy ceasefire between Ukraine and Russia. Brent crude futures were down 1% at $103.55 per barrel in Asian hours. The dollar index , which measures the greenback’s strength against a basket of six currencies, was slightly down at 102.14 but remained not far from the 18-month peak it scaled last week. Trading was confined to a tight range with Japanese markets shut for a holiday, thinning liquidity across the region. “We expect the Houthis to continue their attacks on Saudi Arabian energy assets, supporting gains in the oil price and the USD,” analysts at Commonwealth Bank of Australia said in a note. They added that while Iran had confirmed receiving a US peace proposal through intermediaries, “we do not expect a breakthrough this week.” Against the yen , the US dollar was down 0.14% at 158.160 yen. The Australian dollar and its kiwi counterpart were both roughly flat at $0.6988 and $0.5614, respectively. Beyond the geopolitical backdrop, the market’s focus turns to Wednesday’s US consumer price index report, one of the last major economic releases before the Federal Reserve’s late-October meeting on interest rates. Data last week showed US consumer sentiment slumped further in early October as the rising cost of living because of the Middle East conflict soured households’ views of the economy. The Fed raised rates last month for the first time since 2023 to rein in inflation, with markets keeping a close watch on economic data to gauge whether policymakers may move again. Traders are pricing in an 81% chance of the Fed standing pat this month, up from 51% a month earlier, CME FedWatch tool showed. Even otherwise, the dollar’s rally may be due for a pause in the near term with some pullback possible, Barclays analysts said. They said sharp moves in bond markets had tightened global financial conditions, which could prompt Fed officials to strike a more reassuring tone heading into the October meeting, particularly if the CPI reading comes in soft. Severe selloffs in bond markets in the past few weeks had left investors worried as borrowing costs across the globe rose to multi-decade highs on worries over inflation, energy prices and ballooning government debt. The euro was up nearly 0.1% at $1.121, after clocking a fifth straight week of losses as the common currency bore the brunt of investor angst around France’s fiscal health amid political uncertainty before the 2027 presidential election. “It is still too early to tell whether higher borrowing costs will be sufficient to impose greater fiscal discipline on the French government,” said OCBC FX strategists. “We expect EURUSD to consolidate as the intensity of French fiscal and political headlines is unlikely to be sustained,” they said in a note, adding any rally in the euro is likely to be capped by Europe’s structural challenges. The British pound was little changed at $1.3245. Against the Chinese yuan , the US dollar was flat at 6.6927 yuan in offshore trade. In cryptocurrencies, bitcoin rose 0.2% to $83,788.50, while ether edged 0.15% up to $2,540.08.
STERLING EDGES DOWN BEFORE BoE’S BAILEY SPEECH
The British pound was down slightly against the dollar and the euro on Thursday ahead of a speech from Bank of England Governor Andrew Bailey that could shape expectations for the central bank’s next policy move. Sterling was last down 0.2% against the dollar at $1.3185, just above a three-month low of $1.3181 reached last week. The pound was down about 0.1% against the euro, snapping a nine-day streak of gains. It was last at 84.79 pence per euro . “There are concerns about public debt and rising term premium in the UK gilt market, but so far the pound has been resilient,” said Tommy von Brömsen, FX strategist at Handelsbanken. “Global focus is not on the UK much right now. It’s more on Europe and more on the US.” The euro has been under particular strain, falling to a 17-month low against the dollar as fiscal concerns in France pushed bond yields sharply higher, dampening expectations for further rate hikes from the European Central Bank. Investors are now awaiting speeches from the BoE’s Bailey and policymaker Clare Lombardelli for any hints on whether the central bank could raise rates next month. Bailey and Lombardelli are perceived as centrists on the rate-setting Monetary Policy Committee so their speeches will be closely watched, after both voted to keep rates unchanged at the last meeting. “Any suggestion that they are ready to cross the Rubicon and vote for a hike could depress euro-sterling further today,” said Chris Turner, global head of markets at ING. Money market futures imply a more than 80% chance of a rate hike next month, while two quarter-point hikes are fully priced in by the February meeting.
DOLLAR EASES AS EUROPEAN YEILDS PULL BACK FROM HIGHS
The dollar retreated on Thursday as a rise in euro zone bond yields stalled, while expectations for the path of interest rates from the Federal Reserve this year remained largely intact. Euro zone government bond yields rose sharply again as a surge in oil prices intensified inflation concerns, with investors continuing to sell bonds of heavily indebted countries such as France and Italy. But the euro recovered from its earlier lows as the rise in yields ebbed, with the French 10-year yield up 2.7 basis points at 4.8873% after climbing as high as 4.9685% on the day. France has been hit particularly hard as investors scrutinize its debt load, budget deficit and political outlook ahead of the 2027 presidential election. In Spain, trade unions on Wednesday announced a nationwide general strike over housing issues for November 11, a protest that will take place a few weeks before a snap election. Meanwhile, expectations for a rate hike from the Fed at its policy meeting later this month remain subdued, after minutes released on Wednesday from the central bank’s most recent meeting showed policymakers viewed inflation as the biggest risk to their outlook, and analysts said they offered no surprises. US Federal Reserve Governor Christopher Waller said on Thursday that additional rate hikes will likely be needed to lower inflation to the Fed’s 2% target, but added there was “flexibility” about the pace of increases and left the door open for a pause at the Fed’s upcoming October meeting. Waller’s comments echoed those from some other Fed officials last week that signaled a preference for patience in additional rate increases. “Most other currencies seem to be inversely correlated with their monetary policy expectations, but that was because everything was so dominated by the dollar and by the Fed, and that has continued over the last couple of weeks,” said Christoph Schon, head of multi-asset class investment decision research at SimCorp in London. “The interesting bit is that now we also have this other factor affecting the euro, which is the political crisis in France and also in Spain now … so this is kind of a brief period in which it’s not about interest rate differentials or monetary policy, this is kind of a really specific euro crisis that in this case affects the euro.” The dollar index , which measures the greenback against a basket of currencies, slipped 0.08% to 102.17 after climbing to 102.46, with the euro up 0.08% at $1.1204 after falling to $1.1171 on the day. Markets are pricing in only a 17.2% chance for a Fed rate hike of at least 25 basis points this month, down slightly from 24.4% a week ago, according to CME Fedwatch, opens new tab. But investors are pricing in an 81.2% chance for a hike at the central bank’s December meeting. Following Waller’s comments, analysts at Goldman Sachs said in a note that they continue to expect one additional hike of 25 basis points in December, and lowered their probability the Fed could pass on a December hike as his comments represent a hawkish shift. In more hawkish comments, Federal Reserve Bank of St. Louis President Alberto Musalem said the US central bank will need to hike rates again to bring inflation back to the 2% target. On the economic front, the US Labor Department said weekly initial jobless claims dipped by 2,000 to 197,000, slightly below the 200,000 estimate of economists polled by Reuters as data continues to show job market stability. Euro zone inflation could go higher than already-elevated projections, but European Central Bank policymakers dampened near-term rate hike bets, with multiple officials arguing on Thursday that underlying trends reveal a more benign picture. The widening gap in yields between German bonds and those of more indebted countries in the euro zone, such as France and Italy, has served to push the euro to its lowest level since May last year. Sterling strengthened 0.07% to $1.3219 after Bank of England Governor Andrew Bailey said governments needed to redouble efforts in showing they can repair their public finances as bond markets around the world feel the strain of high levels of borrowing and rising inflation pressures. Against the Japanese yen , the dollar weakened 0.12% to 157.88. The Bank of Japan said price increases driven by higher raw material costs were spreading to consumer goods with some firms hiking prices more often, signaling its concern over broadening inflationary pressure.
