Bloomberg’s coverage earlier this week highlighted criticism of US Treasury Secretary Bessent for being ‘too optimistic’ about the US’s ability to rein in debt and his ability to contain yields. That can undermine confidence and, in turn, appetite for bonds.

Yesterday’s US 3-year Treasury auction cleared at 4.93%, the highest yield since May 2006. Indirect bidders, a group that includes foreign investors, bought 57.6% of the offering, below their 12-month average of around 63%, suggesting that higher yields have yet to revive their appetite fully.

Today’s $39bn 10-year auction will be the real test. We will find out whether elevated yields are enough to convince investors to commit for a longer horizon, despite inflation uncertainty, rising government debt and the risk that yields could climb further. The answer will come in a few hours.

Oil: not out of woods

US crude tested levels below its 50-day moving average as a series of headlines strengthened the bears’ hand. Reports of recovering Middle Eastern exports eased immediate supply concerns, with Reuters putting September Gulf flows, excluding Iran, at more than 81% of pre-war levels.

Meanwhile, the G7 agreed last week to release 100 million barrels of crude and diesel from emergency reserves and pledged to avoid energy export restrictions. In the US, Trump ordered temporary relief for the highway use of red diesel—the fuel normally reserved for off-road use—and the deferral of applicable federal excise-tax payments for the remainder of the year. Together, these measures helped ease concerns about near-term fuel availability and costs.

But none of this news solves the problem at its source: tensions in the Middle East remain unresolved and upside risks persist. Even more so as global oil inventories have been depleted; Saudi Aramco’s CEO warned that the supply cushion is ‘scarily thin’. Even when the Strait of Hormuz fully reopens, price pressures may not fully dissipate, as inventories will have to be replenished and refined product prices may take time to follow crude prices lower.

So we are not out of the woods just yet. US crude has rebounded and is extending gains above the 50-DMA this morning. Inflation risks loom and, combined with higher global yields, put pressure on some pockets of the market. By that, I mean the pockets that don’t have the AI winds behind their backs.

The dollar drives

In FX, the EURUSD rebounded after dipping a toe below 1.12 the day before, while French student protests and the economic data were not necessarily screaming ‘buy the euro’. In fact, Le Pen pledged to bring the deficit down—perhaps helping to pull French yields lower—while German factory orders fell 10.6% in August.

Although the decline was largely driven by volatile large orders, with orders excluding these down just 0.1%, the headline added another brick to the gloomy outlook narrative for the German economy, which is grappling with high energy prices, rising borrowing costs and some political instability as well.

So overall, yesterday’s FX moves were mostly driven by a softer US dollar, and the greenback will remain in the driver’s seat as investors focus on the latest FOMC minutes, alongside today’s Treasury auction and comments from Fed officials.

Remember, today’s minutes cover the latest FOMC meeting, when the Fed decided to raise rates by 25bp to address persistently above-target inflation in the US. That decision is also seen as the beginning of a fresh tightening cycle that could be followed by two or three more rate hikes over the next twelve months.

But of course, neither policymakers nor today’s minutes can tell us precisely what the Fed’s next move will be. The speed and intensity of any further tightening will depend on the data: the balance between inflation and jobs will determine when and by how much the Fed raises rates, if it raises them at all.

What’s important to remember is that these minutes describe the rate debate before the latest jobs and PCE reports. They could therefore sound more hawkish than the latest, softer-than-expected PCE inflation and jobs data would suggest. They should be taken with a pinch of salt.

Keep in mind that since the latest FOMC meeting, markets have significantly scaled back their expectations for an October hike, particularly over the course of last week: the latest pricing puts the probability of an October pause at around 81%.

Long-term inflation expectations have remained broadly stable, which could give the Fed room to avoid back-to-back rate hikes. I wouldn’t expect another rate move before December at the earliest, and a later move may be more likely.

If this is the case, we could see hawkish Fed expectations readjust. Some of the extra hawkishness could be priced out, easing upward pressure on short-term yields and slowing the US dollar’s September–October appreciation.

Yet the dollar will likely continue to find support from the relative growth story. It could even attract safe-haven demand if Europe’s debt headache worsens. From a price perspective, the US dollar index will remain in its bullish consolidation zone above 101.15.

The EURUSD will remain in its bearish consolidation zone below 1.1350, while Cable could enter a medium-term bearish consolidation zone below 1.32—the major 38.2% Fibonacci retracement of the 2025–2026 rally—if the strong-dollar narrative gains ground.