Dollar gains as Fed hikes remain on the table, French fiscal concerns mount

ISM service prices accelerate, Bowman and Logan awaited

The US dollar gained against all but one of the other major currencies on Monday, losing some ground only against the Australian dollar. Today, the greenback is on the front foot against all its peers.

Although Friday’s weak US jobs report significantly reduced the probability of an October Fed hike, the ISM services PMI for September, albeit slowing somewhat, remained well into expansionary territory and most importantly, prices paid accelerated to the highest since July 2022.

The probability of an October hike remained low at around 22%, but a quarter-point increase is fully priced in for December. Excluding the September 16 hike, a total of 85bps worth of additional rate hikes are baked into the cake by the end of 2027. This means that investors priced out the October move, but they remain convinced that more rate hikes will follow thereafter.

With that in mind, traders today may pay attention to remarks by Fed Governor Michelle Bowman and Dallas Fed President Lorie Logan. Last week, New York Fed President John Williams and Vice Chair Philip Jefferson pushed back against expectations of a rushed October hike, even ahead of the NFP report. Thus, investors may pay attention to Bowman’s and Logan’s speeches for clues on whether a December hike is indeed a done deal.

Euro suffers more amid French budget gridlock

The euro was once again the main loser as French political concerns intensified. Yesterday, Prime Minister Sébastien Lecornu’s minority government presented the 2027 budget bill to parliament, with the proposal including roughly 43 billion euros in new savings. However, the proposal is facing major obstacles, with reports noting that opposition parties could demand concessions or threaten a no-confidence vote. October 13 appears to be the date when a detailed debate in the National Assembly will begin.

With investors doubting whether the proposal will pass, French government bond yields extended their rally, with the 10-year French-German yield spread blowing past 140bps, the widest since the Eurozone debt crisis in 2012. It is also worth mentioning that French credit default swaps also soared, as traders are likely pricing in a fiscal contagion across other Eurozone nations as well.

This leaves the European Central Bank (ECB) standing between a rock and a hard place. On the one hand, it needs to continue raising interest rates to fight stubbornly sticky inflation, but on the other hand, aggressive tightening may result in weaker growth and prompt investors to demand even higher yields for financing France’s debt. That’s maybe why Eurozone money markets are now factoring in 65bps worth of additional rate hikes by the end of 2027, compared to 100bps a few days ago.

Stocks gain amid AI enthusiasm, gold remains range-bound

On Wall Street, all three indices closed Monday in positive territory, with the tech-heavy Nasdaq gaining more than 1% and hitting a fresh record high. Enthusiasm about artificial-intelligence investment seems to have continued for a while longer, as the weak US jobs data and the pushback of an October Fed hike allowed investors to cheer strong present values (PVs) for high-growth firms.

However, the gains on Wall Street are occurring alongside the rally in Treasury yields. The 10-year yield remained above 5.30%, a level that could raise companies’ financing costs and at some point, start weighing on present values.

Despite the additional gains in the US dollar, gold remained range-bound, between the key support of $4,115 and the resistance zone of $4,200. Should elevated yields and an even stronger dollar prompt traders to breach the $4,115 zone, the metal may drift towards the psychological round figure of $4,000.