EUROPEAN FX UPDATE: USD falters on shutdown concerns. JPY gains from haven appeal

USD: DXY -0.1%; 97.70

• USD fell victim to selling pressure in early European trade as traders reacted to news that the US government has gone into shutdown (historically a bearish event for the USD). From a market perspective, the focus is two-fold, 1) the duration of the shutdown and the economic impact - desks so far expect the hit to the US economy to be limited, however, this assumption could be tested by the divisions between the Republicans and the Democrats, which could set us up for a longer-than-usual shutdown. 2) The delays it causes to US data points with weekly claims and NFP set to be postponed and CPI also in jeopardy. Such an outcome would mean that FOMC policymakers will have less of a view on the US' economic performance. As such, alternative data points, such as today's ADP report, will take increased importance. Consensus looks for a decline to 50k from 54k. As it stands, markets assign a 95% chance of a rate cut this month and an 80% chance of another in December. Note, ISM manufacturing is also due today. DXY delved as low as 97.46 (lowest since 24th Sept) before recovering modestly.

EUR: EUR/USD +0.2%; 1.1751

• EUR is firmer vs. the broadly weaker USD with Eurozone inflation data having little follow-through into the EUR. HICP Y/Y printed in-line at 2.2% with the move above the 2% mark expected to be a temporary one. Beyond the headline, supercore HICP held steady at 2.3% and services ticked higher to 3.2% from 3.1%. Elsewhere, EZ manufacturing PMI for September was revised higher to 49.8 from 49.5. None of this is set to be a gamechanger for the ECB with the central bank very much on hold for the near-term; only 2bps of loosening is seen by year-end. As such, the USD will likely provide the greatest source of near-term direction for the pair. EUR/USD has risen as high as 1.1778 with focus on a potential test of 1.18 to the upside.

JPY: USD/JPY -0.6%; 147.06

• JPY is top of the G10 leaderboard with USD/JPY briefly slipping below 147. Support for the Yen is partially a by-product of its safe-haven appeal as the US government enters into shutdown. Additionally, the Yen is also being bolstered by the Japanese Tankan survey, which was mixed/in-line, but ultimately viewed by markets as not being enough to derail expectations of a BoJ rate hike next month, with odds of a 25bps increase seen at around 70%, according to Bloomberg data. As a note of caution, Saturday's LDP leadership election is fast approaching and could prompt some political uncertainty. That being said, none of the leading candidates have been particularly vocal in opposing additional tightening from the BoJ or questioning its independence. USD/JPY delved as low as 146.91 with support seen at the 18th September low @ 146.76.

GBP: GBP/USD +0.2%; 1.3468

• GBP is firmer vs. the USD and steady vs. the EUR as incremental macro drivers for the UK remain light. Recent remarks from BoE's Mann echoed her usual hawkish tone with the external MPC member noting that UK monetary policy is relatively loose and the higher for longer inflation scenario is playing out. Elsewhere, final UK manufacturing PMI was unrevised at 46.2 with the report noting that manufacturers are facing an increasingly challenging environment. Focus also remains on the fiscal front as traders ponder how UK Chancellor Reeves will attempt to fill the government's black hole, a gap that is set to widen if reports are correct and the Chancellor opts to lift the two-child benefit cap. Cable has climbed further on a 1.34 handle and eclipsed its 50DMA @ 1.3463 with focus on a test of 1.35 to the upside.

Antipodeans: AUD/USD U/C; 0.6613. NZD/USD +0.4%; 0.5814

• Diverging fortunes for the antipodeans with AUD unable to capitalise on the softer AUD as the weak risk tone caps upside. AUD is likely being hampered by a revision lower in the Australian Manufacturing PMI and reports that China banned BHP iron ore cargoes amid a pricing dispute. AUD/USD sits towards the top end of yesterday's 0.6571-0.6628 range. NZD/USD has extended above yesterday's high @ 0.5817 with focus on a potential test of the 200DMA @ 0.5844.

01 Oct 2025 - 10:20- ForexData- Source: Newsquawk