USD: Resilient, but still facing downside risks – ING

Weekend news suggests very little progress towards ending the US government shutdown, which means further delays in government-issued data. This will probably be another abnormal week in FX, with the pause in most data releases meaning an outsized focus on other macro news. In general, the longer the US government shutdown continues, the more the US Dollar (USD) can face some pressure. But one must also acknowledge that the dollar has shown decent resilience so far, confirming our perception that markets have considerably raised the bar for how bad US news needs to be to build more USD shorts, ING's FX analyst Francesco Pesole notes.

Domestic stories can steer other G10 currencies

"Federal Reserve pricing for December remains just short of 50bp (46bp this morning), close to the median Dot Plot. The event with the greatest market impact potential is the release of Fed minutes from the September meeting on Wednesday. What we’ll be looking for in the minutes is evidence that Chair Jerome Powell’s cautious view on further cuts is shared by the majority of the FOMC. The risks appear slightly tilted to the dovish side and therefore to a negative USD reaction to the minutes. This makes us believe the dollar may not show much idiosyncratic volatility in the coming days, despite facing downside risks. Domestic stories can instead steer other G10 currencies, as we are seeing happening in Japan today."

"We don’t see much more upside room for USD/JPY from here. A much weaker yen stands to add to Japan’s cost of living concerns; the rally in USD/JPY could cause friction with Washington, and the yen may still be preferred should the US government shutdown last longer. Our base case is that this break above 150.0 is temporary, rather than the start of a more sustained rally in USD/JPY."

"The week will be busy with G10 central bank speakers. Powell will give opening remarks at Thursday’s Fed Community Bank event, where other FOMC members, including Michelle Bowman, are set to speak. We’ll also hear from the heads of the European Central Bank and the Bank of England (both today), Norges Bank (tomorrow), and the Reserve Bank of Australia (Friday), alongside other Fed speakers throughout the week. On Wednesday, the Reserve Bank of New Zealand announces policy, and we expect a 25bp cut."