The defensive Japanese yen is the main beneficiary of the ongoing U.S. government “shutdown.” For several days, the USD/JPY pair has been sliding lower, currently at 147.25. Although currency market moves have so far been moderate, investors fear that the current suspension of U.S. government operations could become one of the longest in the past three decades. Historically, shutdowns have lasted between three and 35 days.
Democrats have deliberately entered this dispute, aiming to present themselves ahead of next year’s congressional elections as the party defending the healthcare system. Republicans control the legislative agenda, while President Trump is widely using executive powers. The only real leverage Democrats retain is the requirement of 60 votes in the Senate to approve government funding.
Historical Market Reactions
Experience from previous shutdowns shows they typically result in:
- a steeper U.S. yield curve,
- a slightly weaker dollar,
- and mixed signals for equities.
Currently, S&P 500 futures indicate a 0.5% decline.
Impact on the Economy and Labor Market
Consumer sentiment in the U.S. is clearly deteriorating, alongside a shift in labor market perception – more Americans now believe that finding a job is getting harder. A prolonged shutdown could worsen these trends, particularly if Trump follows through on threats not just to suspend but also to dismiss some federal employees. As many as 150,000 government jobs could disappear from October’s Nonfarm Payrolls (NFP) report due to earlier cost-cutting measures.
An additional challenge is the suspension of weekly jobless claims data and the September employment report. However, markets should still see the ADP employment report (consensus +50k) and the ISM manufacturing index. Weaker results could make the dollar even more vulnerable.
The baseline scenario assumes that goods-related inflation tied to tariffs will be lower than feared, while softer trends in labor and rental markets suggest that services inflation is heading down. This would give the Federal Reserve room to cut rates in October and December.
Market Outlook
In this environment, the U.S. Dollar Index (DXY) could slide toward 97.0, while USD/JPY could drop below 147. Additional declines on Wall Street would further weigh on the greenback.
Yesterday’s remarks by Christine Lagarde were perceived as slightly dovish. While the ECB President said the bank is “in a good place,” she did not rule out rate adjustments. Recent German economic data was disappointing, and markets are not ruling out another ECB cut. Today’s eurozone inflation reading is expected to show headline CPI rising to 2.2% y/y, with core inflation holding at 2.3%.
However, these numbers alone are unlikely to trigger strong gains in the EUR/USD. The dominant driver remains the weaker dollar linked to the U.S. shutdown, which could push the pair toward 1.18 or slightly higher.
Source: CEO.com.pl
