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Financial market volatility is falling across the board, partly driven by the US government shutdown and the delay to key data releases such as the September jobs data. Instead, investors remain transfixed by the AI-driven rally in megacap tech shares, which shows no signs of slowing. Today, look out for US ISM services data, Fed speakers and Turkish CPI.

USD: We'll still see ISM services
 

Traded volatility is falling across financial markets. Investors have settled into the view that the Fed will likely cut rates twice more this year and probably another 50bp in 2026. The US interest rate volatility – so often the driver of volatility in other asset classes – is just not here at the moment. And the delay in big US data releases, such as today's US jobs report, further postpones forming a clear view on the friction between sticky inflation and a softening labour market. Instead, the world is left to watch in wonder at the ongoing AI rally. The latest news is that OpenAI is being given a valuation of close to $500bn in its latest funding round – compared to $300bn earlier this year.

Low volatility means continued interest in the FX carry trade, where the Turkish lira remains very popular (see below). There also remains a strong interest in the Egyptian pound, which continues to rally despite another 100bp rate cut yesterday. Hungary's forint also remains a recipient of carry trade inflows.

The DXY dollar index has ground to a halt near 98. We doubt today's release of the September ISM services data will have much impact. We also have an array of central bank speakers at Klaas Knot's farewell symposium in Amsterdam – including the Fed's John Williams. Additionally, we will hear from Fed superdove, Stephen Miran, twice today. The debate over the next Fed chair has taken a backseat for the time being, but will return. Current betting odds show the favourites as Christopher Waller (12%), Kevin Warsh (10%) and Kevin Hassett (9%).

There are also a couple of weekend event risks for traders to consider. The Japanese LDP leadership election result should be announced tomorrow, where Sanae Takaichi would be seen as more yen bearish than Shinjiro Koizumi. And a Bank of Japan hike is still priced at 60% for the end of the month. We think the yen is undervalued and should meet good buying on any dips. And the weekend also sees an OPEC+ meeting, with risks of a higher supply increase as the Saudis try to reclaim market share. Lower oil prices are a dollar negative.

Chris Turner

EUR: Lower energy prices are good news
 

EUR/USD remains glued to the 1.1700 area. Three-month traded volatility has dropped to its lowest level since last November, at 6.60%. Interestingly, the three-month risk reversal skew in the EUR/USD FX options market remains at 0.5% in favour of euro calls. So, it's not as though investors have given up on the EUR/USD upside; it's more that they think there will be less volatility in general.

As above, lower energy prices are good news for the euro. The euro's terms of trade (export less import prices) are towards the higher levels of the year as both crude oil and natural gas prices soften. This will help the euro's valuation metrics.

For today, there's little eurozone data of note, but we do hear from ECB speakers Lagarde, Schnabel and Wunsch. The ECB script at the moment remains one of the 2.00% deposit rate being at a good place, but that the central bank would not hesitate to act if needed. That threat to act probably means one further rate cut should inflation undershoot at a time of weak activity. However, the market struggles to price another 25bp cut in this cycle.

It's hard to see EUR/USD moving out of a 1.1700-1750 range today.

Chris Turner

TRY: Inflation threatens future rate cuts
 

Today, Turkey will publish its inflation figures for September. We expect September inflation at 2.4% MoM and 32.2% YoY, while risks are on the upside given continuing pricing pressures in food with adverse weather conditions and the start of the school season pushing education inflation higher. Istanbul CPI also printed at 3.19% MoM, implying a higher MoM headline figure. If we get a figure close to or above 3.0%, we can expect current market expectations of central bank rate cuts to come under pressure.

In its latest August forecast, the central bank sees inflation at 28.5% at the end of the year, which already seems like an optimistic projection, and any upward surprise would further reduce the likelihood of this target being met. This would likely lead to rate cuts of less than 250bp at the remaining two meetings this year.

The market shifted to the dovish side after the Central Bank of Turkey's larger-than-expected rate cut, and 1y OIS is close to its lowest levels since the start of the hiking cycle in 2023. Although the market has become accustomed to political headlines, the threat of a cutting cycle should still have an impact, especially at the front of the curve. FX, on the other hand, remains on a stable weakening path, and we believe that nothing will change here until at least the end of the year. TRY thus remains our favourite carry currency in the EMEA world. We expect USD/TRY to head towards 45.00 at the end of the year, but still very well compensated on the carry side.

Chris Turner

CZK: Election fiscal fears are exaggerated
 

The Czech Republic is holding general elections today and tomorrow. Polls widely suggest a change of government, and the question is whether the main opposition party will form a minority government with the support of some parties or whether we'll see a coalition of the current opposition parties. In recent weeks, the market has begun to price in some risk premium, particularly at the end of the bond and IRS curves, signalling fiscal expansion compared to the current fiscally conservative government. At the same time, the Czech National Bank sees fiscal policy as one of its inflation risks, which would suggest higher rates in the future.

However, we consider market concerns to be exaggerated and see Czech assets as cheap after the sell-off in recent weeks. The CZK remains unchanged for now, and the pre-election impact is particularly visible in the fixed income universe. Although we do not expect significant changes on the fiscal side in any election scenario, this may be one of the factors for the central bank to remain hawkish, which should further support the currency. Therefore, despite some potential volatility in the short term, we continue to expect EUR/CZK to head towards 24.00.

Chris Turner

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