Higher-than-expected US inflation and a return in crude oil prices to around $100 a barrel were the two dominant themes in markets last week. USD/JPY briefly rose toward 159 after the US CPI release but failed to hold the move, continuing to trade around the key 158 level. Expectations for a Federal Reserve rate hike changed little, while a sell-off in technology stocks added to risk aversion and limited support for the dollar.
US inflation beats forecasts, but rate-hike bets barely move
The US Consumer Price Index rose 3.7% year on year in September, above the market forecast of 3.6%. The Producer Price Index increased 6.3%, also well above expectations of 5.4%. After the inflation data, attention turned to what the Federal Reserve might do at its October meeting, but Fed Chair Kevin Warsh offered no clear guidance. Markets continued to price the probability of a rate hike at about 17%, little changed from the previous week.
The lack of a meaningful increase in rate-hike expectations helps explain why the dollar did not sustain its gains. USD/JPY briefly tested 159 after the CPI release before pulling back and remaining near 158. At the same time, some market participants argued that declines in artificial-intelligence stocks were prompting investors to reduce risk exposure and cut allocations to US assets, potentially weighing on the dollar. That remains a market view rather than an established driver, and the currency pair continues to reflect both interest-rate expectations and demand for havens.
Yen pressure meets renewed oil-price risk
Japan's Nikkei index fell more than 5% last week, led by declines in artificial-intelligence and chip stocks. Higher US inflation also reinforced concerns about global demand and risk assets. Oil prices rose to around $100 a barrel on Friday as an attack on Saudi infrastructure, growing concerns over shipping security near the Strait of Hormuz, and fears that the US could strike Iran over the weekend supported prices.
Higher crude prices could intensify inflation concerns and alter expectations for the US interest-rate path. In Japan, more expensive energy could also squeeze consumer spending and add to pressure on the economy. In the UK, gross domestic product grew 0.1% in August, beating expectations for a 0.1% contraction and providing some support for sterling. The impact of economic data and geopolitical risks has differed across currencies, leaving markets this week to absorb changes in inflation, energy prices and risk aversion at the same time.
USD/JPY focus remains on the 158 range
The pair's recent short-term uptrend has been disrupted, shifting attention to whether USD/JPY can continue to hold around 158. Technical resistance is seen at 158.50, 159.00 and 160.00. Support levels are located at 157.50, 157.00, 156.00, 155.00, 153.00, 152.50 and 152.00. These levels mark price areas being watched by the market and do not imply that the exchange rate will necessarily reach them.
The US economic calendar is relatively light this week. Scheduled releases include housing starts, pending home sales, leading indicators, the S&P Global manufacturing purchasing managers' index and the University of Michigan consumer sentiment survey. Overseas, China will release GDP on Monday. Tuesday brings the UK unemployment rate and the eurozone ZEW economic sentiment index, while Japan's trade balance and the UK's CPI are due on Wednesday. Friday's calendar includes Japan's national core CPI, UK retail sales, the eurozone composite PMI and the UK's services PMI.
Equity volatility could shape dollar risk sentiment
The Nasdaq 100 fell more than 4% last week, its largest weekly decline since April 2025. Investors were reassessing whether the large spending commitments tied to artificial intelligence would generate corresponding returns. Unverified reports that an AI-themed fund had suffered substantial losses added to the market's concerns. The Dow Jones Industrial Average rose as funds rotated toward more established companies. Japan's Nikkei was also dragged lower by artificial-intelligence and chip stocks.
These equity-market moves matter for foreign exchange because they influence risk appetite. If the technology sell-off continues, investors could further reduce exposure to risk assets. If oil prices remain elevated, inflation expectations could rise again and affect views on US interest rates. This week's focus is whether higher oil prices will intensify concerns about US inflation and whether the decline in AI-related stocks will spread to other markets.