EUROPEAN FX UPDATE: USD boosted as JPY ponders looser fiscal/monetary mix and EUR hit by French political risk

USD: DXY +0.7%; 98.35

• DXY has started the week very much on the front foot after last week's losses, which were driven by a combination of uncertainty surrounding the government shutdown and softening labour market metrics. There hasn't been a great deal of change in the US macro narrative with the US government still shut and the Trump administration stating that mass layoffs of federal workers will begin if President Trump sees that talks are going nowhere. Instead, today's upside in the USD is driven more by the weakness in the JPY and EUR (see sections below for details). With the BLS still unable to publish data, this week's highlights come via Wednesday's FOMC minutes release and Friday's prelim UoM metrics. On the latter, markets will be looking out for any signs of caution over further easing; Powell's remarks on Thursday may carry greater importance. As it stands, markets assume policymakers will lower rates by 50bps by year-end. DXY has ventured as high as 98.39 with the next upside target coming via the 26th September peak @ 98.53.

EUR: EUR/USD -0.7%; 1.1666

• EUR/USD has slipped onto a 1.16 handle and below its 50DMA @ 1.1680 as French political risk returns with a vengeance. Over the weekend, appointments to French PM Lecornu's cabinet were met with stark objections from opposition parties with National Rally leader Bardella stating that the cabinet failed to break with the past. Earlier today, the Socialist Party leaders stated he couldn't see how his party would not be in a position to vote against the government, given that the appointments failed to show a clear change in direction for the government. The political uncertainty saw the GE/FR spread hit its widest level since January with the move subsequently exacerbated (to 87bps) by the recent decision by Lecornu to resign. In terms of what lies ahead, it remains to be seen whether Macron will attempt to appoint a new PM, who will subsequently put together a fresh cabinet that clearly signals change. The more nuclear alternatives to this are fresh legislative elections or for Macron to resign; both would further delay the passage of a budget. Whilst France is clearly gripping the current EZ macro narrative, it will likely be the case that broader macro trends in the region will reassert themselves at some stage and the EUR sensitivity to French political developments will wane. The next downside target for EUR/USD comes via the 25th September low @ 1.1645.

JPY: USD/JPY +2.0%; 150.30

• JPY is the standout laggard across the majors following the LDP leadership election win by Abe-protege Sanae Takaichi. Her victory has been viewed as a combination of looser fiscal policy and delayed BoJ rate hikes, which have triggered a notable steepening of the Japanese curve. Accordingly, markets have scaled back BoJ rate hike bets with money markets pricing around a 75% likelihood that the central bank will remain on hold in the October 30th meeting and just a 48% chance of a 25bps hike by December vs. 68% probability on Friday. Interestingly, Credit Agricole Chief Japan Economist Aida, who is widely considered as a close advisor to LDP's Takaichi, said in a note on Saturday that Takaichi will likely "tolerate" another 25bps BoJ rate hike by January next year if the economy is in firm shape. In terms of the next steps, BoJ Governor Ueda is due to speak on October 8th, whilst the Diet will return mid-October with a vote to appoint LDP’s Takaichi as PM due thereafter. 150.43 is the high watermark for USD/JPY thus far with the next upside target coming via the 1st August high @ 150.91.

GBP: GBP/USD -0.3%; 1.3434

• GBP is softer vs. the USD but firmer vs. the EUR. It remains the case that aside from ongoing angst in the run-up to the November 26th budget, incremental macro drivers for the UK are lacking, and this could remain the case with the domestic data slate light this week. Over the weekend, The Times reported that the UK economy could be on shakier ground than initially assumed amid a "chunky" revision to ONS data, which has increased doubts about how much households have been saving. UK Construction PMI showed a minor upward revision from the prior but remained below the 50 mark. BoE Governor Bailey is due to deliver a keynote speech at Scotland’s Global Investment Summit at 18:30BST. Cable has slipped below Friday's 1.3429 trough but is holding above the 2nd October low @ 1.3400.

Antipodeans: AUD/USD -0.1%; 0.6596. NZD/USD -0.2%; 0.5820

• Both antipodeans are softer vs. the USD but to a lesser extent than most peers. For NZD, focus this week is on Wednesday's RBNZ rate decision, which is set to see a reduction in the OCR. The scale of easing remains in debate, with a Reuters poll finding that 15 of 26 economists expect a 25bp cut to 2.75%, while 11 look for a larger 50bp move. Market pricing currently marginally leans towards a 25bp reduction (53% 25bps vs. 47% 50bps). NZD/USD is holding above the 0.58 mark, trading in a 0.5813-40 range. AUD/USD has slipped onto a 0.65 handle, delving as low as 0.6583, with the next target coming via the 2nd October low @ 0.6576.

06 Oct 2025 - 10:10- ForexEU Research- Source: Newsquawk