Market Overview: US Dollar Extends Pullback Amid Government Shutdown Concerns

The US dollar continues to soften, extending its retreat observed prior to the weekend. It is currently weaker against all G10 currencies and most emerging market currencies. Despite this, intraday momentum indicators suggest the sell-off may be stretched, and some US market participants may await the outcome of President Trump’s scheduled meeting with Democratic Congressional leaders. The key focus is the looming risk of a government shutdown starting Wednesday, which overshadows other short-term factors.

Equity Markets Performance

Global equities are predominantly advancing, with the notable exception of Japanese stocks, where the Nikkei declined by 0.7%. Taiwan’s markets remained closed. Hong Kong’s Hang Seng index led the regional rally with gains approaching 1.9%, while mainland Chinese shares traded in Hong Kong rose by 1.6%. In Europe, the Stoxx 600 index continues its modest upward trajectory, gaining almost 0.40% today following a marginal increase last week. US futures have recovered ground, improving between 0.4% and 0.65%, partially offsetting losses seen last week.

Fixed Income and Yields

Government bonds have rallied alongside stocks. European benchmark 10-year yields fell 2-3 basis points. In the US, the 10-year Treasury yield, which neared 4.20% in the latter half of last week, eased 3-4 basis points to approximately 4.14%. This week, the Treasury will conduct bill auctions but no coupon sales. The softer dollar combined with lower yields and the possibility of a government shutdown provided a boost to gold prices, which surged towards a new record near $3,820. However, gold’s upward momentum has paused, with support around the $3,800 level in North American trading.

Commodities: Oil Pulls Back on OPEC+ Supply Expectations

November WTI crude oil retreated to roughly $64.60 after reaching $66.40 pre-weekend—the highest level since August 1. The pullback comes amid speculation that OPEC+ may decide to increase production again next month at the conclusion of this week’s meeting.

Currency Highlights

US Dollar Index (DXY)

Following a rally on Wednesday and Thursday, the Dollar Index consolidated before the weekend, peaking near 98.60 last Thursday. It has since pulled back further, dipping to nearly 97.85 today. Immediate support is in the 97.70-97.80 range. The risk of a federal government shutdown at midnight tomorrow appears high, with limited optimism that today’s rescheduled meeting between the president and Congress will bridge the divide. Both sides perceive strategic advantages in a shutdown, overshadowing other immediate concerns.

Today’s economic calendar is light, featuring pending home sales and the Dallas Fed manufacturing survey. Tomorrow, home price indices, August JOLTS data, and September’s Conference Board consumer confidence will be released. A shutdown would likely delay the September employment report, increasing the significance of the ADP private sector job estimate, which is forecasted in the Bloomberg survey to grow by 48,000 jobs.

Euro (EUR)

The euro reached a two-week low near $1.1645 last Thursday before recovering above $1.1700 ahead of the weekend. Additional buying today has pushed the pair closer to the lower bound of resistance between $1.1735 and $1.1750, suggesting the possibility that a short-term low is in place. This development could open the door to testing the $1.1800–1.1815 area.

EU confidence surveys published earlier today had minimal market impact, but CPI data remain the main focus this week. Spain reported a rise in its EU-harmonized CPI from 2.7% to 3.0% in September following recent credit rating upgrades by Moody’s and Fitch. Germany, France, Italy, and other major eurozone countries will release their inflation data tomorrow, with the ECB’s aggregate inflation estimate expected Wednesday. Headline inflation has hovered between 1.9% and 2.1% in recent months, with the core rate flat at approximately 2.3%.

Chinese Yuan (CNY)

The dollar approached this month’s high slightly below CNH 7.15 last week, strengthening to nearly CNH 7.14 before the weekend. The yuan has since eased modestly, trading just below CNH 7.12. The pair appears passive, moving largely in response to shifts in the dollar. Technical support targets lie just below CNH 7.11.

After setting the daily fix higher for the third consecutive session at CNH 7.1152 before the weekend, the People’s Bank of China lowered it today to CNH 7.1089. China is scheduled to release September PMI figures tomorrow, although market reaction is expected to be limited. Chinese markets will be closed from October 1 through October 8. Exchange rates remain tightly managed, resulting in muted impacts from domestic data. Despite recent dollar strength, the yuan remains one of the world’s strongest currencies.

Japanese Yen (JPY)

The dollar’s rebound from a two-month low near JPY 145.50 during the Fed Chair’s post-FOMC press conference stalled just below JPY 150.00 last week. The dollar retreated to approximately JPY 149.40 ahead of the weekend and extended losses, trading just below JPY 148.50 early in European session.

Intraday momentum suggests the decline is overextended. The US 10-year Treasury yield, which approached 4.20% last Thursday, now sits near 4.14%. A renewed rise in yields could help the dollar retest levels above JPY 150.

Japan will report August industrial production and retail sales data tomorrow. Industrial output is forecast to decline 0.9% following a 1.2% drop in July, indicating a challenging start to Q3 after averaging 0.2% growth in the first seven months. Retail sales are expected to rebound by 1.2%, partially recovering from a 1.6% decline in July.

The fragility of the domestic economy may underpin the Bank of Japan’s hesitation to raise rates this year, despite increasing market expectations of eventual tightening. The upcoming Tankan survey and Japan’s ruling party leadership election, which will determine the next prime minister, are key events to monitor this week.

British Pound (GBP)

The UK released August consumer credit and mortgage data earlier today, though these failed to significantly influence market sentiment. Since the FOMC meeting, the UK 10-year gilt yield has surged nearly 15 basis points while sterling has depreciated about four cents (approximately 3%).

After stalling ahead of the weekend, short-covering helped sterling recover from roughly $1.3325 to nearly $1.3415. Follow-through buying today has pushed the currency to $1.3450, where intraday momentum indicators are stretched. Resistance lies near $1.3465, with a break above potentially targeting $1.3525–$1.3550.

Canadian Dollar (CAD)

The Canadian dollar weakened to its lowest level since mid-May last week despite a stronger-than-expected 0.2% July GDP print. The USD-CAD pair reached a high near 1.3960 in European trading before data, finding support around 1.3930. It has since declined to approximately 1.3915 today. A break below 1.3900 could open the door to 1.3870.

Swap markets show little reaction to the GDP data and continue pricing roughly a 75% probability of at least one rate cut in Q4 2025.

Australian Dollar (AUD)

Following the FOMC meeting, the Australian dollar retreated from its yearly peak just above $0.6705 to around $0.6520 at the end of last week. It then consolidated around $0.6550 before rising to nearly $0.6575 today. Clearing this level decisively could strengthen confidence that the near-term low is in.

Intraday momentum indicators are overbought, limiting immediate upside. The Reserve Bank of Australia (RBA) meets tomorrow, with no change in monetary policy expected. Market reaction will hinge on the guidance provided by RBA Governor Bullock. Recent private sector credit growth of 0.6% aligns with Bullock’s caution regarding additional rate cuts.

Mexican Peso (MXN)

The USD-MXN pair climbed from a yearly low near 18.20 around the FOMC meeting to a high near 18.5650 ahead of the Banxico rate cut last week. It then retraced to just above 18.33 before the weekend, closing above the 61.8% Fibonacci retracement level. Today, it eased slightly below 18.32.

A breach below 18.30 could signal a return toward 18.20. Despite a busy economic calendar this week—including unemployment, remittances, IMEF surveys, and auto sales—these releases are unlikely to move the peso materially. Banxico remains open to further easing but will not meet until November 6, with another policy meeting scheduled December 18. Thus, this week’s data are unlikely to influence central bank decisions.