EUROPEAN FX UPDATE: USD once again on the front foot despite ongoing impasse on Capitol Hill

USD: DXY +0.3%; 98.38

• DXY is extending on yesterday's upside that was triggered by JPY and to a lesser extent, EUR weakness. The government shutdown continues to grip the US macro narrative but is failing to weigh on the USD at the start of the week. This view may be re-appraised in the event that it drags on and has a more tangible impact on the US economy. Furthermore, the lack of tier 1 official stats releases is hampering visibility on the economy for Fed officials. The shutdown still shows no signs of being resolved after Democrat and Republican bills to end the shutdown failed to secure sufficient votes for passage in the Senate. As such, it is looking increasingly likely that mass layoffs of Federal workers are on the cards. For today's docket, given that trade and consumer metrics will not be published, markets will instead focus on US RCM/TIPP Economic Optimism, NY Fed SCE and Atlanta Fed GDP metrics. FOMC minutes are due tomorrow, however, greater focus may instead be placed on more timely Fed speak from the likes of Bostic, Bowman, Miran, and Kashkari. Markets broadly continue to expect 2 x 25bps rate cuts from the Fed by year-end. DXY has ventured as high as 98.40 but ran out of steam ahead of yesterday's peak @ 98.49.

EUR: EUR/USD -0.4%; 1.1666

• EUR remains on the backfoot vs. the USD with EUR/USD returning to a 1.17 handle as French political risks remain front and centre. In terms of the latest, outgoing PM Lecornu has been instructed by Macron to hold final discussion with political parties to see if there is a way forward. There are three paths the current crisis could take: 1) a new PM, which would appease opposition parties. 2) Fresh legislative elections. 3) An early Presidential election. Betting markets currently see a 53% chance of option 2. However, it is unclear that this would resolve anything and could well lead to a continuation of the ongoing stalemate in Parliament. Option 3 is unlikely. However, Far-right leader Bardella has stated it is on the table. In the absence of any tier 1 Eurozone data or notable policy shifts from the ECB, French politics is acting as a guiding force in the near-term. However, unless there is a more material risk of contagion into broader EZ assets from French paper, its importance will likely fade. German industrial orders disappointed this morning but failed to generate any traction in EUR. ECB's Nagel and Lagarde are due to speak later. EUR/USD has delved as low as 1.1666 but is holding above yesterday's trough @ 1.1651.

JPY: USD/JPY +0.2%; 150.78

• JPY is once again lagging vs. the USD but to a lesser extent than most G10 peers. Focus remains on the fallout from Saturday's LDP leadership election in which, Abe-protege Takaichi was declared the victor. Subsequently, the market implications have been viewed as a looser fiscal and monetary policy mix. However, it remains to be seen how much sway the incoming PM will have on policy at the BoJ. Accordingly, investors look to scheduled speeches from multiple BoJ officials ahead of the October meeting; however, Wednesday's apperance by Governor Ueda has been cancelled. Note, typically, looser fiscal policy would be met with tighter monetary policy. However, given the close nature of the government and central bank in Japan, these lines are blurred and therefore a source of great speculation for the market. For now, markets price just a 26% chance of a hike later this month. USD/JPY has been as high as 150.70 with the next upside target coming via the 1st August peak @ 150.91. Note, Finance Minister Kato attempted to jawbone the currency overnight but it had little impact on JPY.

GBP: GBP/USD -0.4%; 1.3436

• GBP is softer vs. the USD but steady vs. the EUR. It remains the case that in the absence of any tier 1 data, focus in the UK is on the ongoing angst in the run-up to the November 26th budget. Ahead of which, Bloomberg reports that Chancellor Reeves is set to receive an unexpected GBP 5bln boost to her budget plans from inflation, which raises the taxable value of incomes, profits, and prices. The gain offsets higher debt servicing costs, helping narrow the UK’s projected GBP 20-30bln budget shortfall ahead of the budget. That being said, the Chancellor is clearly not out of the woods and has some very tough decisions to make. Additionally, former BoE and OBR official, Sir Charlie Bean has stated that the Chancellor does not have a credible plan to grow the economy and get debt down. Cable sits towards the lower end of yesterday's 1.3417-90 range.

Antipodeans: AUD/USD -0.4%; 0.6586. NZD/USD -0.6%; 0.5806

• Both are at the foot of the G10 leaderboard with NZD lagging its antipodean peer in the run up to tomorrow'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 (54% 25bps vs. 46% 50bps). NZD/USD has slipped below yesterday's trough @ 0.5810 but is just about holding above the 0.58 mark. AUD/USD has moved back onto a 0.65 handle but is yet to breach yesterday's low @ 0.6583. Note, the broader trend for AUD/NZD remains an upwards one in lieu of the ongoing increases in gold prices.

07 Oct 2025 - 10:15- ForexEU Research- Source: Newsquawk