The EUR’s decline following oil price surge was cushioned by expectations of further European Central Bank rate hikes. EUR/USD fell a modest 0.2% overnight to 1.1612, despite an 8% jump in Brent crude. The ECB delivered its widely anticipated 25-bps hike to 2.50% yesterday. The governing council’s hawkish tone and upward revisions to the ECB Staff’s growth and inflation forecasts reinforced expectations of 1-2 hikes at the October and December meetings. Nevertheless, the EUR’s performance this month appears more closely tied to its “Anti-USD” role. 
Higher oil prices initially supported the USD through haven demand and expectations of a more hawkish Fed. Brent crude spiked 8% overnight to a four-month high of USD109 per barrel, reinforcing bets on a Fed hike next week and another in December, after the November US midterm elections. However, the 30Y Treasury yield’s 7.6 bps rise to 5.365%, a fresh 19-year high, highlighted the USD’s vulnerability to growing US borrowing costs. The persistent bond sell-off suggests investors are demanding greater compensation for holding long-term US debt. It also casts doubt on Treasury Secretary Scott Bessent’s ability to contain yields through buybacks.
The USD’s disappointing performance after last Friday’s stronger-than-expected nonfarm payrolls also warrants caution ahead of today’s US CPI release. The upside surprises in PPI have heightened concerns about another strong inflation reading. Consensus forecasts point to August headline inflation accelerating to 0.4% MoM from 0.1% in July, with core inflation holding at 0.2%.
The approaching US midterms are also adding political pressure to the USD’s fading exceptionalism narrative. Ahead of the 2024 presidential election, expectations of tax cuts, deregulation, and stronger growth supported demand for US assets. Today, US President Donald Trump’s weak approval ratings on economic management raise questions about his ability to deliver those benefits without aggravating inflation and fiscal pressures. The prospect of the Iran conflict extending through midterms adds to the uncertainty. Electoral pressure could encourage further fiscal spending promises and renew demand for lower interest rates, complicating both the Fed’s inflation fight and the Treasury’s efforts to contain long-term borrowing costs.
Therefore, the USD remains vulnerable to surrendering gains triggered by strong US economic data and higher oil prices. Higher Treasury yields provide less support when they reflect greater compensation for inflation and fiscal risks, rather than confidence in stronger US growth.
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Today in history
On September 11, 1909, German astronomer Max Wolf rediscovered Halley's Comet on its return trip to the inner solar system.
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