Broadly, the US dollar index has now extended gains above a key Fibonacci resistance, pushing into the medium-term bullish consolidation zone, which may mark the end of the bearish trend building since the beginning of 2025. And this stronger US dollar regime could develop further as long as US yields push towards multi-decade highs, whether because of strong economic fundamentals, spiralling debt and/or elevated energy prices. It is only when investors feel that they have pushed hawkish Federal Reserve (Fed) expectations far enough that the dollar could give back some of its recent strength.

As I discussed in detail yesterday, a further flattening of the US yield curve, a further narrowing of the US 2–10-year spread and a potential inversion of that portion of the yield curve could mark that point. But we are seeing the gap between US 2- and 10-year yields widen again, following the September dip below 20bp. Yesterday’s fall in short-term yields suggests that investors are already scaling back part of their hawkish expectations, even as longer-term yields continue to rise. That softening was supported by softer-than-expected JOLTS data, showing that job openings fell more than expected in August, to a five-month low. Consumer confidence, on the other hand, retreated to a 12-year low.

In Europe, economic data from euro area countries looked mixed yesterday. Industrial sales in Italy rose more than expected in July, but business and consumer surveys from the broader euro area hinted at weak – and weakening – confidence in September, as inflation expectations rose further on rising energy prices. And it’s not only expectations: harmonised inflation in Spain actually accelerated faster than pencilled in during September, hitting 5% on an annual basis.

The combo of mixed economic data and heated Spanish inflation couldn’t give the European Central Bank (ECB) hawks the strength they needed to counter the dollar’s advance, though. As such, the US rates story continued to dominate the price action, and EURUSD slipped below a critical technical level: 1.1350, the major 38.2% Fibonacci retracement of the 2025–2026 rally, which distinguishes between the almost two-year-long euro appreciation against the US dollar and the end of this bullish trend. The pair is now in the medium-term bearish consolidation zone, with potential to deepen losses.

Today, investors will be closely watching the ADP report, the latest US GDP update and the US PCE data – core PCE being the Federal Reserve’s (Fed) preferred gauge of underlying inflation. There are a few combinations that could result in different outcomes in terms of market pricing:

But what’s going on at the index level doesn’t tell the full story. As we discussed in yesterday’s comments, the S&P 500’s equal-weighted version is diverging notably – and negatively – from its market-cap-weighted version, hinting that market breadth is narrowing again and that a few tech companies are masking the loss of appetite across sectors and companies.

The AI story continues to defy rising yields – and truly, demand is probably strong enough for AI-related companies to absorb another 50–100bp increase in rates over the next 12 months. Yet demand must remain strong – that’s the condition sine qua non for keeping technology names afloat. If demand slows, or if there are any doubts regarding the strength of AI growth, valuations could come down – and because we have a lot of circularity and interdependence in tech valuations, one weak link could trigger a broader chain reaction across the sector.

This brings me beautifully to Micron earnings, due today after the closing bell. The company heads into earnings with an exceptionally high bar. The company itself guided for around $50bn in quarterly revenue, an extraordinary 86% gross margin and roughly $31 in adjusted EPS. Strong AI-driven demand for HBM and tight DRAM supply remain the core drivers, and the company is trading at a P/E ratio of about 23x and a forward P/E ratio of around 7x.

That gap reflects how much earnings are expected to grow from here. Therefore, simply meeting – or even beating – expectations may not be enough to trigger a rally. Investors will want to see another strong beat, solid guidance – that’s the important point: solid guidance – and signs that today’s exceptional demand, pricing power and margins can be sustained. Otherwise, that 7x forward P/E could quickly become less attractive if earnings expectations are revised lower.

I believe that Micron has little reason to leave investors doubting the strength of demand for its chips. Questions remain around the pace of development of frontier AI models and the sustainability of AI spending, but the financial weight that companies like OpenAI and Anthropic carry on their shoulders could weigh heavily on their decisions and limit their willingness to slow down meaningfully.

As such, strong Micron earnings could help AI stocks resist the pressure from higher yields by keeping the cornerstone of the current strong growth and solid earnings narrative firmly in place. But they won’t fix the weakness beneath the surface: a handful of AI names may keep the major indices afloat while the broader market continues to deteriorate.