The US dollar rose sharply against all major global currencies yesterday, particularly the euro and the pound, following the release of the US Consumer Price Index report. The market interpreted the data as confirmation that inflationary pressures remain elevated, meaning the Federal Reserve still has grounds for further monetary tightening. This added pressure on European currencies, which were already facing headwinds from France's budget situation and energy-related risks.

The headline Consumer Price Index rose by 0.6% month over month in September, following a 0.4% increase in August. This was fully in line with economists' forecasts and marked the largest monthly increase in five months. Annual inflation accelerated to 3.7% from 3.4% in the previous month, also matching expectations. Energy prices accounted for the largest contribution. The energy index jumped by 5.2%, compared with 2.1% in August, while gasoline prices rose by 9.1%, accounting for more than half of the monthly increase. Over the year, energy prices increased by 20.4%, while gasoline prices surged by 34.2%.

Core inflation proved more significant. The index excluding food and energy rose by 0.3% month over month, unchanged from August but above the forecast of 0.2%. On an annual basis, it accelerated to 2.6% from 2.4%, also exceeding expectations of 2.5%. Services excluding energy rose by 0.4%, following a 0.3% increase in the previous month, while housing costs increased by 0.4%, compared with 0.3% previously. Annual services inflation reached 3.1%. Airfares rose by 1.2% month over month and 22.4% year over year, used car prices increased by 0.7%, and prices for recreation and education also rose, while food prices remained unchanged. Consumers are losing out as higher fuel and service costs erode their purchasing power, while investors positioned for a more restrictive Fed policy stand to benefit.

The implications for the central bank are important. New York Fed President John Williams said the previous day that he saw disinflationary forces at work, that core inflation measures had declined, and that there was no need for a rate hike in 2027. The latest data challenge this assessment. Core inflation has not slowed; instead, it has accelerated on an annual basis. This suggests that the energy shock is beginning to spread to other prices. In my view, this transmission is what economists call second-round effects, and it is precisely what the Fed is most concerned about.

The implications for interest rates can be summarized in three points. First, a rate hike at the October 27–28 meeting remains unlikely because headline inflation matched forecasts, while core inflation exceeded expectations by just 0.1 percentage points. Second, a rate hike in December is becoming almost inevitable, with fewer arguments against it than a week ago. Third, Williams's scenario, in which the tightening cycle ends this year, now appears less convincing. Meanwhile, the position of hawkish policymakers, including Beth Hammack and Lorie Logan, who have argued that more than one additional rate hike may be necessary, is strengthening. The market had already priced in a December rate hike and two more in 2027, and the latest data have reinforced that outlook. As a result, bond yields and the US dollar remain supported.

The forecast is as follows: the Fed will keep rates unchanged in October and raise them in December, while its rhetoric will become more hawkish because core inflation provides no grounds for a more accommodative stance. As long as gasoline prices remain high and oil prices continue to rise, the dollar is likely to retain its advantage. The euro and the pound are expected to remain under pressure, and attempts to recover are likely to be met with renewed selling. The dollar could weaken only if energy prices decline significantly or signs emerge that the labor market is cooling.

As for the current EUR/USD technical outlook, buyers need to break above 1.1241. Only then will a test of 1.1275 become possible. From there, the pair could advance to 1.1310, although achieving this without support from major market participants would be quite difficult. If the pair declines, significant buying activity is expected only near 1.1193. If no substantial buying interest emerges there, it would be preferable to wait for a new test of the 1.1156 low or consider opening long positions at 1.1117.

As for the current GBP/USD technical outlook, pound buyers need to break above the nearest resistance at 1.3256. This would open the way toward 1.3282, although breaking above that level would be quite difficult. The next major target is the 1.3307 level. If the pair declines, bears will attempt to regain control below 1.3222. If successful, a break below this level would deal a serious blow to the bulls and push GBP/USD toward the 1.3202 low, with the potential for a further decline to 1.3183.