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Markets may be wary of U.S. government shutdown and lack of U.S. data
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Hello everyone, today XM Forex will bring you "[XM Forex]: The market may be cautious about the U.S. government shutdown and lack of U.S. data." Hope this helps you! The original content is as follows:
Political Risk in the Spotlight
After the Fed-led period, political risk has monopolized the market's attention. The U.S. government shutdown and developments in France and Japan have been fueling an atypical risk-off reaction, with the dollar, gold and U.S. stocks surging. Gold, in particular, has been making headlines for its continued gains, only to pull back over the past two trading days as news of a Gaza ceasefire agreement broke.
Will the U.S. shutdown continue into its third week?
Although most investors are taking the U.S. federal government shutdown lightly as a short-term event, little progress has been made since October 1. Despite calls from both sides for swift reconciliation before the shutdown harms the U.S. economy, Democrats and Republicans remain unyielding at this stage.
Multiple Senate votes have failed so far, which could mean Trump's involvement may be necessary to get the show off the road, assuming he's interested in finding www.xmltrust.common ground. Discussions outside the door are expected to intensify next week, but the outcome is uncertain.
The market reacted calmly to the absence of employment data in early October, however, CPI and PPI reports and retail sales data will be released next week. Another week without official data could raise questions about expectations for a 25 basis point interest rate cut from the Federal Reserve. Interestingly, there are reports that the US Bureau of Labor Statistics is working on www.xmltrust.compiling the CPI report, but its release date is still unknown and may even occur before the October 29 Fed meeting.
That said, if the shutdown ends next week, the BLS may struggle to meet its own data calendar. This means a revised calendar will be published, possibly with delaysuntil the end of the year to normalize releases, and there is a good chance that two non-farm payrolls reports will be released in the same calendar month.
Meanwhile, as the next blackout period begins on October 18, both Fed doves and hawks are expected to be cautious in laying out their arguments. It is worth noting that since September 19, the Fed's speech has not been overly dovish, and most centrist members have tried to muddy the waters to make the October interest rate decision less predictable. However, the market seems adamant that another rate cut will be announced.
The US dollar has had a good week, rising sharply, especially against the euro and yen. Despite concerns about the impact on the U.S. economy, continued shutdowns may not stop, especially if Fed speeches remain balanced next week and the positive momentum in U.S. stocks continues.
Part of the reason why U.S. politicians are relatively relaxed about the shutdown is the strong performance of U.S. stock indexes. That said, a reversal of the current bullish trend, such as several strongly negative trading days, could prove to be a powerful catalyst in getting funding bill talks back on track.
Japan’s political chaos will never end
It has been a week since Sanae Takaichi won the election for the leadership of the Liberal Democratic Party, but her future is already looking bleak. After the dissolution of the long-standing alliance between the LDP and Komeito - assuming there is no Komeito U-tern over the weekend - Takaichi has two options: seek support elsewhere - particularly from the right-wing Democratic Progressive Party - or resign and allow the LDP to choose a new leader who can reset the LDP's relationship with Komeito.
Meanwhile, the DPP appears to be the kingmaker. The main opposition party has proposed nominating Tamaki as a candidate in the upcoming prime ministerial vote against Takaichi, but the leader of the Democratic Progressive Party disagrees with the proposal. Likewise, he ruled out the possibility of an LDP-DPP coalition government lacking a majority in parliament.
The yen reacted slightly positively to the split between the Liberal Democratic Party and Komeito, but the outlook for Japan has become gloomier. Japan's Finance Ministry, working with the Bank of Japan, is likely to keep a close eye on the yen's underperformance, but a new prime minister must be elected soon. Meanwhile, a Bank of Japan rate hike in October seems unlikely, but December remains an "active" month.
Developments in France undermine euro's appeal
Political developments in France have disturbed the relative calm in the euro zone. President Macron must choose another prime minister, but the left-wing Popular Front and Le Pen's National Rally continue to hold the keys to the National Assembly. As a result, the path forward remains tricky, with the 2026 budget deadline pushed back to mid-December.
EUR/USD underperformed as French sovereign bond yields edged higher amid the need for a credible solution to France's political impasse. A new round of parliamentary elections is less likely at this stage, as the two parties are expected to dominate again. Macron may therefore decide to break the deadlock by calling early presidential elections. But this may happen in 2026.
Is China prepared to adopt new support measures and a more relaxed stance of the People's Bank of China?
With the end of Golden Week, China has resumed business. Next week's calendar includes trade balance data and, most importantly, September's CPI and PPI reports. China continues to struggle with deflation, with numerous support programs so far failing to boost the domestic economy. It is worth noting that the Chinese authorities are preparing for the Fourth Plenary Session of the 20th CPC Central www.xmltrust.committee scheduled to be held from October 20 to 23, which may initiate further actions.
Interestingly, the World Bank this week raised its GDP forecasts for 2025 and 2026, citing strong consumption, strong exports and further policy support. At next week's annual IMF-World Bank meeting, where the October 2025 World Economic Outlook (WEO) will be released, a similar upward revision is likely, in part due to the recognition that tariffs may be less damaging than widely expected.
In addition, the www.xmltrust.communication channels between China and the United States will be activated again. Despite multiple meetings, a www.xmltrust.comprehensive agreement is still difficult to reach. As a result, trade-related headlines are likely to be at the top of daily news reports.
Key UK employment data, GBP needs boost
Key UK labor market data will be in focus next week as the market believes that the early November meeting will not lead to interest rate changes. Following a strong performance in the second quarter, momentum may have stalled in the third quarter of 2025, as seen in the monthly GDP Industrial Production and S&P Global Purchasing Managers Index surveys. Tuesday's negative number on jobless claims changes could make August's positive number an outlier in a recent improving trend.
At the same time, the Labor government is preparing for the budget at the end of November, and tax increases seem inevitable. Such an outcome could force the Bank of England to adopt a more dovish stance, posing additional headwinds for sterling, which has managed to regain some of its losses against the euro amid rising political risks in the euro zone.
www.xmltrust.commodity currencies have mixed fortunes
While the New Zealand dollar underperformed against the U.S. dollar after the Reserve Bank of New Zealand unexpectedly cut interest rates by 50 basis points, both the Canadian and Australian dollars fared better. Starting with the former, confidence dipped slightly following Wednesday's meeting between the U.S. and Canada on tariffs and the USMCA, putting the recent dollar strength on hold.
Similarly, AUD/USD has also stabilized, retreating from one-year highs as the Reserve Bank of Australia continues to remain on the sidelines following its hawkish meeting in late September. This week's inflation-related data supported the RBA's view that the deceleration in inflation has slowed, with focus now turning to next week's employment data.
The RBA also believes that "labor market conditions remain somewhat tight." Thursday's jobs data may further support this view, keeping the chances of another RBA rate cut low and potentially boosting the Australian dollar - especially if the U.S. government mayWeakness following reopenings as investors begin to digest weak U.S. data.
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