he former was boosted by the continued normalisation of rates across the US yield curve, while the latter experienced a massive short-covering rally as markets price in a victory by the extreme right and supposedly more market friendly Jair Bolsonaro. Bolsonaro secured a higher-than-expected share of the vote in the first round of voting, although still fell short of an outright majority and will therefore require a victory in a second round vote at the end of the month.

The key focus for the coming weeks will be the evolution of interest rates in the US. The 10-year Treasury yield has broken through some key psychological levels and, at 3.23%, is the highest since the post-crisis year of 2011. Given this, it is somewhat surprising that the Euro has held on as well as it has. If the link between the US Dollar and US yields continues to weaken, we may revise our Euro forecasts higher in the coming weeks.

Major currencies in detail

GBP

Prime Minister May appears to have survived the Conservative Party conference, thus removing one of the potential sources of instability in Sterling ahead of critical Brexit negotiations.

Moreover, there have been hints of increased flexibility from the European Union side ahead of the first critical negotiation headline on 18th October. We still expect Sterling to respond positively to any hint that both sides are inching closer to an agreement.

EUR

Euro held up surprisingly well in the face of a sharp 0.15% increase in US 10 year Treasury yields. No doubt positive unemployment and retail sales data had a positive effect on sentiment. The Euro’s relative poise in the face of higher US yields is even more impressive given that the problems around the Italian budget are far from resolved.

With little data of note out this week, the Euro will likely be driven largely by news around the Italian conflict with Brussels and the evolution of yields in the US.

USD

Yields in the US continue to shoot higher, on the back of optimistic Federal Reserve comments and very strong economic data. Friday’s payrolls report printed yet another record low in unemployment for this cycle, and its lowest level since 1969, as more people are drawn in by the strength of the US labour market. The headline job creation number fell short of expectations, although wages posted another modest but steady increase of 2.8%.

This week’s inflation data out on Thursday will be critical, given the nerves in the Treasury market. An upward surprise in the core inflation number could really rattle Treasury investors and send yields higher towards the 3.5% psychological level.