05/10/2025 Week Ahead

U.S. Shutdown Drags On, Political Shifts Abroad

Key Takeaways:

  • The US federal government shutdown began on 1 October as Congress failed to pass funding bills.
  • Financial markets stayed resilient, with major US, European and Asian equity indices reaching record highs.
  • Treasury yields fell, led by the 10-year note, and the US dollar weakened against most major currencies.
  • The shutdown is expected to continue, with no immediate resolution in sight.
  • Japan’s LDP selected Sanae Takaichi as its next leader, likely making her Japan’s first female prime minister.
  • China’s extended holiday and the US data blackout limit news flow from the world’s two largest economies.
  • The Reserve Bank of New Zealand is the only G10 central bank meeting this week.

The US federal government entered a shutdown after Congress failed to pass any appropriations bills for the new fiscal year starting 1 October. While this has disrupted government operations and affected workers and projects, markets have remained largely unfazed. Equity indices in the US, Europe and Asia climbed to fresh record highs. The S&P 500 and Nasdaq advanced strongly ahead of the weekend, mirrored by gains in Europe’s Stoxx 600, the MSCI Asia Pacific Index and the MSCI Emerging Market Equity Index. US Treasury yields fell across the curve, with the 10-year yield declining nearly three basis points for the week and the two-year yield dropping more than five basis points despite a late-week rebound. The US dollar weakened against all major currencies except the Canadian dollar, which lagged in an otherwise soft greenback environment.

The shutdown is set to continue into the coming week, with both political parties positioning for electoral advantage ahead of next November’s midterms. Internationally, Japan’s ruling LDP has chosen Sanae Takaichi as its next leader, positioning her to become the country’s first woman prime minister once confirmed by the Diet later this month. In Europe, the Czech Republic is holding elections where populist Andrej Babis is expected to win, which could result in reduced military support for Ukraine. Meanwhile, China’s extended Golden Week holiday and the absence of key US government data, including the September employment report, are likely to keep major news flow muted from the two largest economies.

The Reserve Bank of New Zealand stands out as the only G10 central bank holding a policy meeting this week. Economists lean toward a 50 bp rate cut, though markets are less convinced. On the data front, the key releases include Japanese labor earnings and household spending, German factory orders and industrial production, and Canadian trade and employment reports. Mexico will release September CPI and industrial production data, adding to a week where monetary policy and data outside the US take center stage.

United States of America

Overview

The federal government remains shut with no signs of a quick resolution. Historically, shutdowns have had minimal impact on financial markets and the broader economy. The commonly cited rule of thumb is that each week the government is closed reduces GDP by about 0.1%. Given the abundance of Federal Reserve and private sector data, and the fact that monetary policy is set with future conditions in mind, expectations remain anchored for a rate decision at the end of the month. An agreement to reopen the government does not appear close, and both political sides seem to be preparing for a drawn-out standoff.

Economic Drivers

  • Federal government shutdown is ongoing, shaving an estimated 0.1% off GDP for each week it continues.
  • Monetary policy decisions remain forward-looking, supported by robust private sector and Fed data despite the shutdown.
  • No imminent political deal is expected to reopen the government, prolonging uncertainty.

Data and Events

  1. 07 October 2025: FOMC Members Speak
  2. 07 October 2025: Trade Balance
  3. 08 October 2025: Consumer Credit
  4. 09 October 2025: FOMC Meeting Minutes
  5. 09 October 2025: Unemployment Claims
  6. 09 October 2025: Fed Chair Powell Speaks
  7. 10 October 2025: Average Hourly Earnings
  8. 10 October 2025: Non-Farm Employment Change
  9. 10 October 2025: Unemployment Rate
  10. 10 October 2025: Prelim UoM Consumer Sentiment
  11. 10 October 2025: Prelim UoM Inflation Expectations
  12. 11 October 2025: Federal Budget Balance

Price Action

  • Dollar Index ended a two-week rally, slipping about 0.4%.
  • Market is consolidating within a 97.40–98.15 range, with a break of this band seen as technically significant.

Key Points:

  • Shutdown continues with no clear resolution in sight.
  • Limited economic impact expected in the short term.
  • Fed data releases proceed despite government closure.
  • Dollar Index consolidates after a modest decline.
  • Market focus remains on monetary policy trajectory later this month.

Australia & New Zealand

Overview

The Australian dollar remains closely tied to movements in the US Dollar Index, with the rolling 30-day inverse correlation holding near -0.80. This strong relationship peaked in August at around -0.85, marking the most extreme level of the year. The currency also shows a moderate positive correlation with changes in the US–Australia two-year interest rate differential, while maintaining a strong negative correlation of about -0.60 with movements in the two-year US yield.

Australia’s domestic economic calendar is relatively light, with only a few bank surveys scheduled. Market attention will partly turn to New Zealand, where the Reserve Bank is expected to deliver another rate cut early in the week. This will mark the ninth consecutive cut in the easing cycle that began in August last year. The target rate currently stands at 3.0%, down from 5.50% at the start of the cycle, and markets anticipate a terminal rate near 2.25%. Sweden’s Riksbank Deputy Governor Breman has been appointed to take over as RBNZ governor from 1 December, adding a leadership transition to the mix.

Economic Drivers

  • Australian dollar maintains a strong inverse correlation with the US Dollar Index, currently near -0.80.
  • Correlation with US–Australia two-year interest rate differential is slightly above 0.25, indicating a modest positive link.
  • Correlation with US two-year yields is around -0.60, underscoring the AUD’s sensitivity to US rate dynamics.
  • Domestic economic data is limited, shifting attention to external monetary developments.
  • RBNZ expected to continue its aggressive easing cycle, influencing regional currency sentiment.

Data and Events

  1. 06 October 2025: MI Inflation Gauge
  2. 07 October 2025: Westpac Consumer Sentiment
  3. 08 October 2025: RBNZ Official Cash Rate
  4. 08 October 2025: RBNZ Rate Statement
  5. 09 October 2025: MI Inflation Expectations
  6. 10 October 2025: RBA Gov Bullock Speaks

Price Action

  • Australian dollar gained nearly 1% last week after falling 1.6% over the prior two weeks.
  • Weekly high formed on Tuesday just below 0.6630, while support held near 0.6570.
  • Momentum indicators suggest ongoing consolidation, with upside risks if the 0.6630–0.6635 zone breaks.
  • A sustained move higher could target the 0.6700 area, marking a retracement objective.

Key Points:

  • AUD remains strongly inversely correlated to the US Dollar Index.
  • Domestic data is limited, with regional focus on RBNZ policy action.
  • RBNZ expected to deliver another rate cut, continuing its easing cycle.
  • AUD technical setup shows consolidation with upside potential.
  • Short-term movements remain tied to US yield dynamics.

Canada

Overview

The Canadian dollar continues to be heavily influenced by the overall direction of the US dollar. The rolling correlation between changes in the Dollar Index and USD/CAD remains near 0.65 and has held above 0.60 for over five months. The currency also shows a strong inverse correlation with the S&P 500, now near -0.55, highlighting the risk-on and risk-off dynamics that shape its movements. Trade tensions involving the US and China have weakened Canada’s economic backdrop, while markets are pricing in a 95% chance of another policy rate cut in the fourth quarter.

The upcoming week will focus on Canada’s merchandise trade data and employment figures. Weak trade performance has contributed to slower growth, while the labor market has lost significant momentum compared to last year. These releases will offer key insight into the broader economic slowdown and guide expectations for monetary policy into year-end.

Economic Drivers

  • Canadian dollar remains closely tied to US dollar trends, with a rolling correlation near 0.65.
  • Inverse correlation with the S&P 500 has reached -0.55, showing heightened sensitivity to global risk sentiment.
  • Trade tensions with the US and China continue to weigh on economic performance.
  • Swaps market is pricing a 95% chance of a policy rate cut in Q4.

Data and Events

  1. 07 October 2025: Trade Balance
  2. 07 October 2025: Ivey PMI
  3. 10 October 2025: Employment Change
  4. 10 October 2025: Unemployment Rate

Price Action

  • USD/CAD climbed to 1.3985 last week, its highest level since May.
  • Price held just below the 200-day moving average at 1.3990 and has not closed above it since April.
  • Resistance extends toward 1.4020, with momentum indicators stretched and warning of potential near-term reversal.
  • A move below 1.39 would increase the probability that a top is in place.

Key Points:

  • Canadian dollar remains strongly linked to US dollar direction and global risk appetite.
  • Trade tensions continue to weigh on economic outlook.
  • Markets expect another policy rate cut in Q4.
  • Merchandise trade and employment data will be closely watched.
  • USD/CAD faces technical resistance near 1.40, with signs of stretched momentum.

China

Overview

Chinese authorities continue to guide the yuan closely alongside the US dollar, maintaining a managed currency stance during the recent holiday period. Mainland markets have been closed since 1 October for the national celebrations and will reopen on 9 October. Trading activity in offshore markets has been relatively stable, with limited movement in the yuan against the dollar.

The upcoming week is expected to bring a few key data points despite the shortened schedule. Market attention will be on foreign exchange reserves and lending figures, as well as potential updates on the People’s Bank of China’s gold purchases, which could influence sentiment in global commodity markets.

Economic Drivers

  • Yuan remains closely guided by authorities to shadow the US dollar.
  • National holiday closure has kept onshore market activity muted.
  • Official management of the currency remains a key stabilising force.

Data and Events

  1. 09 October 2025: New Loans

Price Action

  • Before the holiday, USD-CNH was trading near 7.1300.
  • Since then, the pair has held within a narrow 7.1225–7.1400 range.
  • Offshore trading has been calm, with the next move likely skewed to the downside as markets reopen.

Key Points:

  • Yuan remains tightly managed against the US dollar.
  • Market activity has been quiet during the national holiday.
  • Reserves, lending and gold purchase data may provide fresh signals.
  • Offshore yuan trading shows limited volatility with downside bias.
  • Reopening of mainland markets could bring directional movement.

Europe

Overview

The euro’s downside momentum following the FOMC meeting on 17 September has moderated, with the currency continuing to broadly follow the US–German two-year interest rate differential. Economic conditions across the Eurozone remain fragile, led by persistent weakness in Germany, where growth has stagnated. The median forecast suggests GDP expanded by only 0.1% in Q3, underlining the lack of momentum in the bloc’s largest economy.

This week brings a series of key German economic reports including factory orders, industrial production, and trade figures, which will provide further clarity on the country’s trajectory. Broader Eurozone data releases such as France’s trade balance and industrial output figures from Italy and Spain are expected to have limited market impact. Political tensions are simmering in France, where the Socialist Party has criticised Prime Minister Lecornu’s budget and may oppose the government in an upcoming confidence vote. Meanwhile, Moody’s is set to review Belgium’s credit rating (Aa3/AA-) at the end of the week, with the country already on a negative outlook and yields sitting above German levels.

Economic Drivers

  • Euro continues to track the US–German two-year interest rate differential.
  • German economic growth remains weak, with Q3 GDP expected to rise only 0.1%.
  • France faces political uncertainty ahead of a possible confidence vote.
  • Belgium’s credit outlook is under review by Moody’s, highlighting fiscal risks.

Data and Events

  1. 06 October 2025: Retails Sales
  2. 07 October 2025: ECB President Lagarde Speaks
  3. 07 October 2025: German Factory Orders
  4. 07 October 2025: French Trade Balance
  5. 08 October 2025: ECB President Lagarde Speaks
  6. 08 October 2025: German Industrial Production
  7. 09 October 2025: ECB President Lagarde Speaks
  8. 09 October 2025: German Trade Balance
  9. 09 October 2025: ECB Monetary Policy Meeting Accounts

Price Action

  • Euro gained about 0.25% last week, marking its seventh weekly advance in the past 10 weeks.
  • Resistance sits near 1.1780, with a stronger break above 1.1815 seen as technically significant.
  • Support remains firm above 1.1645, with last week’s low just below 1.1685.
  • Momentum indicators remain neutral, allowing the current consolidation to persist.

Key Points:

  • Euro’s downside momentum has eased, driven by rate differentials.
  • German data will be closely watched for signs of recovery.
  • Political developments in France add uncertainty.
  • Belgium’s credit rating review may influence regional sentiment.
  • Euro remains range-bound with key technical levels intact.

Japan

Overview

The yen remains highly sensitive to US interest rate movements, but domestic political developments have added a new layer to the outlook. Sanae Takaichi’s victory in the LDP leadership contest paves the way for her to become the next prime minister. Her policy stance favors fiscal stimulus and continued monetary accommodation, which could influence the JGB market through expectations of expanded government spending and a prolonged period of easy monetary policy. Takaichi has stated that the government is responsible for both fiscal and monetary policy, while the Bank of Japan should adopt the best methods to support this stance.

Markets are now balancing external rate dynamics with internal policy signals. While the yen remains undervalued by most measures, Japan’s current account surplus is primarily supported by returns on overseas investments rather than trade, as the country continues to run a small trade deficit. Economic data this week may shape expectations for the Bank of Japan’s next steps, but rate hike probabilities have remained relatively stable despite recent labor market surprises.

Economic Drivers

  • Yen remains closely tied to US interest rate movements.
  • Takaichi’s leadership win introduces expectations for fiscal stimulus through a supplemental budget.
  • Her policy stance supports maintaining an easy BOJ policy, aligning fiscal and monetary efforts.
  • Current account surplus is driven by investment income, not trade, despite an undervalued yen.
  • Market pricing sees a 75% chance of a BOJ rate hike before year-end, and just over 56% chance for a move this month.

Data and Events

  1. 07 October 2025: Household Spending
  2. 07 October 2025: Leading Indicators
  3. 08 October 2025: Average Cash Earnings
  4. 08 October 2025: Current Account
  5. 08 October 2025: BOJ Gov Ueda Speaks
  6. 08 October 2025: Economy Watchers Sentiment
  7. 09 October 2025: Prelim Machine Tool Orders
  8. 10 October 2025: Bank Lending
  9. 10 October 2025: PPI

Price Action

  • Dollar retreated from near 150.00 on 25–26 September to around 146.60 last week.
  • Trendline support from April (139.90) and July (142.70) lows begins the week near 146.50 and ends near 146.70.
  • A break below this trendline could target 145.50, the 17 September low and two-month trough.
  • Upside risks remain following Takaichi’s election, with a move above 147.85 pointing toward the 148.25–148.65 zone.

Key Points:

  • Yen remains highly responsive to US yields.
  • Takaichi’s policy direction favors fiscal expansion and dovish monetary policy.
  • BOJ rate expectations are steady despite labor market fluctuations.
  • Current account surplus remains supported by investment income.
  • Technical picture shows key support near 146.50 and resistance above 147.85.

United Kingdom

Overview

Sterling remains closely tied to the broader direction of the US dollar, with the rolling 30-day inverse correlation against the Dollar Index at approximately 0.90, and 0.85 over the past 60 days. While this dominant relationship typically drives short-term moves, shifts in long-term UK gilt yields can occasionally influence the exchange rate during periods of market stress or extreme movements.

The UK’s economic calendar is quiet in the coming days, offering few domestic catalysts to drive the currency independently. Construction PMI and house price data are scheduled, but these typically have limited market impact. As a result, sterling is likely to remain reactive to global macro developments, particularly movements in the US dollar.

Economic Drivers

  • Sterling maintains a strong inverse correlation with the US Dollar Index, near 0.90 over 30 days and 0.85 over 60 days.
  • Long-term UK gilt yields can occasionally sway the currency during volatile periods.
  • Domestic economic data is light, keeping the focus on external drivers.

Data and Events

  1. 06 October 2025: Construction PMI
  2. 07 October 2025: BOE Gov Bailey Speaks
  3. 08 October 2025: FPC Meeting Minutes
  4. 08 October 2025: FPC Statement
  5. 09 October 2025: RICS House Price Balance

Price Action

  • Sterling’s recent recovery stalled near 1.3525, the 50% retracement level of the post-Fed decline.
  • A break above this level would target the 1.3570 area.
  • Support is near 1.3400, with a drop below 1.3370 signalling potential retest of the 1.3325 low.
  • Momentum indicators remain mildly supportive of the current recovery.

Key Points:

  • Sterling remains driven by US dollar movements.
  • Domestic data is limited and unlikely to shift sentiment.
  • Long-term gilt yields can influence price during market extremes.
  • Key technical levels sit near 1.3525 on the upside and 1.3370 on the downside.
  • Short-term momentum supports a modestly constructive bias.

SKONE Enterprise provides expert market analysis and forecasts. Our insights help traders and investors navigate the complex currency landscape.

© 2025 SKONE Enterprise (003319453-V). All rights reserved.

The content on this site is for informational purposes only and does not constitute financial advice.