Matthew Ryan, CFA, Head of Market Strategy at Ebury, said: “The dollar has come under a bit of selling pressure, although investors won’t be losing too much sleep just yet, that is of course providing they view the closure as a brief disruption, rather than a more elongated cessation in federal activities. A prolonged impasse that drags on for more than a few days could trigger a flight to safety, with the yen and the franc looking best placed to perform well.”
Matthew Ryan added: “Similar to 2018, an extended standoff may weaken the dollar should markets bet that the shutdown could harm the US economy and prompt a faster pace of Federal Reserve interest rate cuts. This remains a distant scenario for now, but markets will be wary of a repeat from Trump’s first term.”
USD
The dollar is trading mildly lower against most currencies so far this week, which we can really only put down to jitters surrounding the government shutdown. While a short disruption would likely be brushed aside by markets, and have limited impact on FX, a prolonged impasse that drags on for more than a few days (even weeks) would no doubt trigger an increase in market unease and volatility. The dollar lost 1.5% of its value during the last shutdown in 2018/19 (which lasted for a record 35 days), and its entirely plausible that we could see a repeat performance should the current saga drag out in a similar manner.
Yesterday’s dump of data painted a relatively mixed picture on the state of the US economy. Job openings unexpectedly ticked higher to 7.23 million in August, but quits (which tend to increase during boom periods in a sign that workers feel more secure in finding alternative employment) actually slumped again to 3.1 million – the lowest level since November. Consumer confidence also dropped and, at 94.2, is now at its weakest point since April. All eyes would ordinarily turn to Friday’s payrolls release, but this (along with other official government data) will be delayed until an agreement is reached in Washington.
EUR
We’ve seen a modest tick higher in EUR/USD so far this week, with the common currency now trading around our end of third quarter target, just above the $1.17 level. Focus today will be on this morning’s September inflation report. The consensus of economists suggests a modestly stronger headline number of 2.2% (up from 2%), but with yesterday’s German HICP print surprising markedly to the upside (2.4% vs. the 2.2% estimate), this could be a touch on the conservative side.
ECB President Lagarde said on Tuesday that inflation risks appeared quite contained in both directions, and markets appear pretty confident that the Governing Council is done with its easing cycle. A strong inflation reading today would merely cement these expectations. A handful of other ECB officials will be speaking in the coming days, including members de Guindos, Montagner and Schnabel. We will also be keeping tabs on the final September PMI figures on Friday, particularly after the flash readings showed a surprise dichotomy in performance between the bloc’s two largest economies, Germany and France.
GBP
The final quarter of 2025 is gearing up to be an extremely important one for the pound and one that, quite frankly, could go one of two ways. Probably the two main uncertainties are the following: a) will the Bank of England lower rates again before the year is out and, b) what will the UK government announce at November’s Autumn Budget. On the former, the monetary policy committee remains divided, as while members Ramsden and Breeden have this week hinted at a support for further cuts, hawk Catherine Mann warned yesterday about the risk of above target inflation.
Meanwhile, Chancellor Reeves did nothing during this week’s Labour conference to ease fears ahead of the looming budget. Not only is the market speculating further tax hikes ahead, but Labour have not ruled out such a scenario. There have even been suggestions that the chancellor is considering breaking an election promise by hiking VAT, which would be a pretty ominous development for the pound, as markets would price in both higher inflation and lower growth ahead, which is never a pleasant combination.