Happy Monday. Treasury yields are climbing and the dollar is holding near a two-month high after back-channel negotiations between the US and Iran collapsed once again, leaving markets grappling with renewed inflation risks and bracing for a heavy week of data releases.

Energy prices are edging higher, adding to inflation pressure and bolstering expectations for tighter monetary policy. Over the weekend, President Trump rejected Iran’s latest proposal to reopen the Strait of Hormuz, though he claimed negotiations would resume this week; Tehran, for its part, showed no sign of scaling back its demands. Front-month Brent futures are trading for almost $108 a barrel, up 18% this month, while US crude goes for $95 as traders further downgrade the likelihood of a full resumption in energy flows out of the Middle East before the end of the year.

Ten-year Treasury yields are holding near their highest since 2007. High energy prices stemming from the war with Iran, together with mounting evidence of economic resilience, led the Federal Reserve to raise rates earlier this month for the first time since 2023, and robust data in recent weeks have only reinforced tightening expectations: a report last week showed business activity accelerating in September at its fastest pace in five years, even as price pressures intensified. Markets are putting the odds on a second consecutive hike at the October meeting near 70%, and have almost four moves priced in by next September, helping tilt rate differentials in the dollar’s favour.

Markets may be overshooting, but the move could prove difficult to reverse. Tomorrow’s consumer confidence numbers, Wednesday’s personal consumption expenditures release, and Thursday’s manufacturing survey from the Institute for Supply Management are all expected to underline resilient demand in the US household and corporate sectors. The Atlanta Fed’s GDPNow model is pointing to an annualised growth rate approaching 5% this quarter. And Friday’s payrolls report is forecast to show job growth moderating to about 100,000 in September—well above the 50,000 threshold now seen as the labour market’s break-even pace—giving the Fed room to focus on inflation and helping keep rates and the dollar elevated.

Here in Canada, the exchange rate is unlikely to receive an assist from tomorrow’s gross domestic product release. The consensus expects the economy to have lost momentum in July and August, giving back earlier gains, and that weakness could extend into the fourth quarter as firms and households turn cautious in the face of another round of American tariffs. Current swap-market pricing, for at least three rate hikes by April, is hard to square with evidence of persistently weak demand, and we think rate differentials could widen a little further before a pullback in the “American exceptionalism” trade offers the loonie some relief.

In the euro area, Friday’s inflation figures could help determine whether the European Central Bank raises rates next month. Eurostat is expected to report that core prices—excluding food and energy—rose just 2.5% in the year to September, suggesting soaring energy costs are not spilling over into other categories. But policymakers may decide to move anyway: like their counterparts in the US, UK, Canada, and Japan, they have broken with long-standing orthodoxy, signalling that they will no longer “look through” volatile commodity prices. An acceleration in the headline measure—from 3.2% in August to 3.5% or higher—could see markets doubling down on tightening bets.

Bottom line: The old dictum, ‘don’t fight the Fed’, now holds true in currency markets, where the greenback is enjoying gains typical of the early stages of a tightening cycle. The move is unlikely to last—it could take a single Truth Social post or negative economic data surprise to crack its momentum—but for now, it is best to get out of the way.