29/09/2025 Market Watch

U.S. Political Uncertainty as Dollar Retreats

Key Takeaways:

  • US dollar remains under pressure against G10 and most EM currencies.
  • Market focus on potential US government shutdown and political negotiations.
  • Equities broadly higher, led by Hong Kong, while Japan lagged.
  • Bond yields edge lower, gold near record highs.
  • Oil retreats as OPEC+ considers output decisions.

The US dollar is extending its recent decline, trading weaker against all G10 currencies and most emerging market peers. Momentum indicators suggest the move is stretched, and traders may wait for clarity from political negotiations in Washington before pressing the sell-off further. The key risk is whether the US government shuts down mid-week if no agreement is reached between President Trump and congressional Democrats.

Global equities are generally firm. In Asia, Japan underperformed with the Nikkei falling 0.7%, while Hong Kong’s Hang Seng led with a gain of nearly 1.9% and mainland shares listed there rose 1.6%. European markets are in positive territory, with the Stoxx 600 up almost 0.4%. US futures are also firmer, erasing part of last week’s losses. Bond markets are seeing renewed demand, with European 10-year yields down 2-3 basis points and the US 10-year yield slipping to around 4.14% after testing 4.20% last week.

Gold prices have pushed to record levels near $3820, supported by the weaker dollar, falling yields, and the risk of a US shutdown. The rally has stalled for now, with potential for a test of $3800 in the North American session. Oil prices are retreating as attention shifts to OPEC+ deliberations. November WTI, which touched $66.40 before the weekend, has pulled back to $64.60, with speculation mounting that producers could raise output again next month.

United States of America

Overview

The Dollar Index, which rallied midweek, eased back ahead of the weekend after peaking near 98.60. It has since slipped toward 97.85, with support seen in the 97.70-97.80 range. The primary concern in markets is the looming risk of a federal government shutdown, which appears increasingly likely as both the White House and congressional leaders show little willingness to compromise. This political impasse overshadows other short-term economic considerations.

The immediate calendar is relatively light, with only a few second-tier indicators due. However, the impact of a shutdown could be significant, as it would delay the release of critical data such as the September employment report. In that scenario, private sector estimates, including ADP’s payroll data, may receive heightened attention. The ADP consensus forecast points to a modest increase of 48k jobs, which could play a larger role in shaping market expectations.

Economic Drivers

  • Rising risk of a federal government shutdown at midnight, with little progress in political negotiations.
  • Market confidence pressured by policy gridlock in Washington.
  • Broader uncertainty as delayed data releases could alter the economic narrative.

Data and Events

  1. 29 September 2025: Pending Home Sales
  2. 29 September 2025: FOMC Members Speak

Price Action

  • Dollar Index retreated from last week’s peak of 98.60, trading near 97.85.
  • Key support seen in the 97.70-97.80 region.

Key Points:

  • Dollar Index consolidates after midweek rally, trading lower near support.
  • Government shutdown risk dominates sentiment, with low chances of compromise.
  • Data flow is light but includes housing and confidence indicators.
  • A shutdown could delay the September jobs report, shifting focus to ADP data.
  • Markets remain cautious as political uncertainty overshadows fundamentals.

China

Overview

The yuan ended last week under modest pressure as the dollar approached its monthly high near CNH7.15 before easing back toward CNH7.14. Today, the currency has been sold slightly below CNH7.1200, with the next possible technical target just under CNH7.1100. Movements remain largely reactive to shifts in the broader dollar trend rather than domestic developments.

The People’s Bank of China continues to guide the market closely. After setting the daily fix higher for three consecutive sessions and reaching the strongest level this month at CNY7.1152, the central bank adjusted the fix lower to CNY7.1089 today. Despite this, exchange rate movements remain tightly managed, leaving limited scope for volatility. Market participants are awaiting China’s September PMI data due tomorrow, though the impact on the yuan is likely to be minimal given the managed nature of the currency. Looking ahead, mainland markets will be closed from 01 October to 08 October for holidays, reducing liquidity and limiting reaction to data during that period.

In the broader context, while the yuan has softened slightly in response to the stronger dollar following the Federal Reserve’s recent policy stance, it remains one of the more resilient currencies globally. This underscores the effectiveness of policy guidance and the controlled nature of the exchange rate system.

Economic Drivers

  • Yuan trading remains closely tied to US dollar moves.
  • PBOC continues to manage the currency through daily fixings, maintaining stability.
  • Market focus on September PMI data, though likely to have limited effect on exchange rate.
  • Upcoming extended market closure in China will reduce liquidity and dampen reactions to economic releases.

Data and Events

No major economic releases are scheduled today.

Price Action

  • Dollar peaked near CNH7.15 last week before easing toward CNH7.14.
  • Current trading slightly below CNH7.1200, with next target under CNH7.1100.
  • PBOC set fix lower today at CNY7.1089 after three consecutive higher fixes, including a monthly peak of CNY7.1152.

Key Points:

  • Yuan remains reactive to US dollar trends rather than domestic drivers.
  • PBOC continues to tightly manage exchange rate through daily fixings.
  • September PMI data due tomorrow, but impact expected to be limited.
  • Mainland markets closed from 01 to 08 October, reducing liquidity.
  • Yuan remains among the strongest global currencies despite softer tone.

Europe

Overview

The euro tested a two-week low near $1.1645 last Thursday but rebounded back above $1.1700 heading into the weekend. Buying interest has continued into the new week, pushing the single currency toward the $1.1735-$1.1750 resistance zone. A break higher could reinforce the view that a near-term bottom has been established, potentially opening a move toward $1.1800-$1.1815.

Economic data flow is centered on inflation this week. While confidence surveys published earlier today are not typically market-moving, the focus is firmly on consumer prices. Spain released its September EU-harmonized CPI, which accelerated from 2.7% to 3.0% following recent credit rating upgrades by Moody’s and Fitch. The remaining large eurozone economies are due to publish national inflation figures tomorrow, with the European Central Bank’s aggregate estimate scheduled for Wednesday. Headline inflation across the bloc has held between 1.9% and 2.1% over the past four months, while the core rate has remained steady at 2.3%.

Economic Drivers

  • Euro recovered after testing two-week lows, supported by renewed buying momentum.
  • Spain’s credit rating upgrades from Moody’s and Fitch provided an additional lift.
  • Inflation is the key theme, with Spain’s CPI rising to 3.0% in September.
  • Eurozone headline inflation has been steady at 1.9%-2.1% for months, with core stable at 2.3%.

Data and Events

  1. 29 September 2025: Spanish Flash CPI

Price Action

  • Euro rebounded from two-week low at $1.1645 to above $1.1700.
  • Resistance seen in $1.1735-$1.1750 range, with potential upside to $1.1800-$1.1815.

Key Points:

  • Euro bounced after hitting two-week low, supported by renewed demand.
  • Focus is on eurozone inflation data this week.
  • Spain’s CPI accelerated to 3.0%, with other large members reporting tomorrow.
  • Headline inflation has held steady, core rate unchanged at 2.3%.
  • A push through resistance could confirm a near-term low and open further gains.

Japan

Overview

The dollar’s recovery against the yen, which began after the Federal Reserve Chair’s comments following the recent FOMC meeting, stalled just under JPY150.00 last week. After pulling back to around JPY149.40, further selling pressure at the start of this week pushed the pair below JPY148.50 during early European trading. The move looks overextended in the short term, but US yields remain a key driver. The 10-year Treasury yield has eased from 4.20% last week to near 4.14%, keeping upward pressure on dollar-yen dynamics.

Japan faces a busy week of economic data and political developments. Industrial production and retail sales are due tomorrow, with expectations for another monthly decline in output, underlining weakness in the manufacturing sector. Q3 has started poorly, with output averaging just 0.2% growth in the first seven months before back-to-back monthly contractions. Retail sales are forecast to rebound 1.2% in August, partially reversing July’s 1.6% drop, though the year-to-date trend has been flat. These figures highlight a fragile domestic economy, which helps explain the Bank of Japan’s caution in tightening policy despite rising market expectations of a rate hike. Later in the week, attention will turn to the Tankan survey, while political focus will be on the ruling LDP leadership election, which will determine the country’s next prime minister.

Economic Drivers

  • Dollar-yen influenced by shifts in US Treasury yields.
  • Weak domestic activity with industrial production contracting and flat retail momentum.
  • Market expectations for a possible BoJ rate hike continue to build, though policymakers remain cautious.
  • Tankan survey seen as the key economic release this week.
  • Political uncertainty as the LDP prepares to elect its new leader and prime minister.

Data and Events

No major economic releases are scheduled today.

Price Action

  • Dollar recovery stalled just under JPY150.00 last week.
  • Pulled back to JPY149.40 before the weekend, then slipped under JPY148.50 in early European trading.
  • Dollar-yen remains sensitive to movements in US 10-year yields, which eased from 4.20% to 4.14%.

Key Points:

  • Dollar-yen recovery stalled as pair retreated below JPY148.50.
  • US yield movements continue to guide short-term direction.
  • Japan’s industrial production and retail sales highlight weak domestic conditions.
  • Market attention on Tankan survey and LDP leadership election.
  • BoJ’s reluctance to hike persists despite rising market expectations.

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