USD: Tentative turnaround
The US dollar index – DXY – extended its decline on Monday, falling for a second consecutive day amid rising risks of a potential U.S. government shutdown. Unless an agreement is reached by the end of today, the US government faces a partial shutdown as partisan gridlock stalls funding negotiations. Democrats and Republicans remain divided over health care provisions and budget priorities, with neither side backing down. While this is unlikely to move FX markets materially, a potential delay in releasing key labour market data this week could soften the dollar’s recent momentum, which has been buoyed by strong macro surprises. It would serve as a reminder of how political dysfunction can undermine economic clarity. Should the situation escalate, we see this as a mild dollar negative.
Despite this, the greenback has shown overall resilience in September, with the DXY up 0.2%, even as the Fed cut rates. Hawkish forward guidance, combined with upbeat data releases, helped offset the bearish impact of an already-priced-in cut. The next test for the dollar is the durability of the improved data landscape. The extent to which economic data continues to strengthen will determine whether the dollar can break out of its structural bearish trend and initiate a more sustained rebound.
Much hinges on the upcoming NFP release this week. If it disappoints, the recent rebound may prove to be just another temporary upside move within a broader bearish trend. We see a scenario where USD long buyers take advantage of the brief decline following the likely shutdown – which historically has had minimal impact on FX – reloading at more favourable levels ahead of a potential rally driven by strong labour market data. Whether this positioning proves purely tactical or something more durable will depend, once again, on the frequency and sustainability of data confirming U.S. economic resilience, and the Fed’s hawkish recalibration in response.
Today’s JOLTS data kicks off the week and is expected to set the initial directional bias for dollar price action, especially given today’s heightened sensitivity of the greenback to labour market indicators.
EUR: Highs hinge on a softer Fed
Despite inflation undershooting expectations on a month-on-month basis for both Belgium and Spain, the euro rose against the dollar yesterday amid renewed USD-negative sentiment tied to the likely government fallout. We remain skeptical about the long-term implications of this risk event on FX and expect yesterday’s gains to be pared back, assuming US labour market data – due this week – shows signs of improvement.
While inflation has so far been subdued, upcoming data from other major economies – France and Germany today, followed by the eurozone Wednesday – may offer support to the common currency. However, US labour market data will be the dominant driver this week.
Today, we know that a dovish shift is necessary for EUR/USD to reclaim year-to-date highs. Back in late June, when expectations rose about Fed rate cuts – though they ultimately did not materialise – the euro was propelled to year-to-date highs at the time ($1.1829). Today, a similar tilt reoccurred, with $1.1919 claimed as a new high, although it remains uncertain whether this will evolve into a sustained easing cycle.
A second failure to reach a more established easing would underscore the Fed’s continued prudence today. Despite rate cuts, the cautious stance – driven by persistent inflation concerns and a resilient macroeconomic backdrop – suggests that the thrust into higher EUR/USD highs may remain subdued, stripping away bullish policy fuel amid persistent hawkish leanings.
GBP: Pound rebounds but dollar still calls the shots
GBP/USD kicks off the week with renewed momentum, extending its rebound from the solid support zone at $1.3365–$1.3323. Monday’s rally looks set to stretch a little further, as recent weakness is unwound and technical levels continue to hold. Options markets are reflecting this shift, with both 1-week and 1-month risk reversals turning less bearish. That said, positioning over a 12-month horizon remains the most negative in six months.
The key risk event in play is the potential U.S. government shutdown, which could weigh on the dollar via increased economic uncertainty and the prospect of fiscal tightening. If the dollar softens as expected, GBP/USD could build on its recent recovery, having already climbed about 1% to $1.3437. Still, the currency pair is about to record its worst quarter this year – down over 2% – having recoiled sharply from above $1.37 several times in Q3.
In the UK, attention also turns to the Labour Party conference, where any signs of pressure toward more expansionary fiscal policy could raise concerns about future borrowing needs. In a world already saturated with debt, the UK may face market scrutiny sooner than its peers. Bottom line: markets remain uneasy about the UK’s fiscal outlook, and negative headlines could trigger selloffs in gilts and sterling. But if GBP navigates the week without fresh shocks, the USD side of the equation will likely take the lead – as is usually the case.
GBP/EUR risks skewed lower whilst trading below key moving averages
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: September 29- October 3
All times are in BST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
