The Imminent End of the U.S. Government Shutdown Disrupted the Dollar’s Strengthening Trend

In line with analysts’ expectations, the U.S. dollar interrupted its short-term recovery trend against the European currency at the beginning of the week. The announcement that the U.S. government funding blockade would soon be lifted resulted in a decline in value in the currency markets. The dollar index, which tracks the movement of the dollar against a basket of six major world currencies, weakened by 0.1 percent reaching a value of 99.643 points.

This is a consequence of the news that U.S. senators reached a temporary agreement on Sunday to end the budget paralysis that has blocked part of public services for a record 40 days. Republicans and Democrats in the Senate agreed on government funding until January, as reported by CNN and Fox News. The measure was immediately put to a vote, evidently with the support of a sufficient number of Democrats, and will then be forwarded to the House of Representatives. If the House also approves it, the proposal will be sent to Donald Trump for signing.

This step forward leads towards normalizing the situation, considering that air traffic operations and social assistance payments are currently disrupted, and hundreds of thousands of officials have been in a technical strike or working without pay since October 1. The euro exchange rate against the dollar was around 1.1569 dollars before noon. The U.S. dollar has strengthened in recent days, and the EUR/USD currency pair subsequently slid from levels above 1.16 to just below 1.15 dollars for the euro. The main reason was quickly identified, as highlighted in Raiffeisen Bank’s analysis.

A Tailwind for the Dollar

Namely, the chairman of the U.S. Federal Reserve Jerome Powell emphasized at last week’s Federal Reserve meeting that a rate cut in December is not guaranteed. While a 25 basis point cut during the October meeting was agreed upon with broad consensus (though not unanimously), the outlook for December is less clear, and the current shutdown further complicates the issue. Financial markets reacted quickly, adjusting expectations for the interest rate path, which pressured the euro against the dollar.

– Recent skepticism towards riskier assets, given the very high valuations in the stock markets, likely provided another (small) tailwind for the dollar. In addition to the aforementioned factors, the prolonged U.S. government shutdown ensured that there was no acute pressure on the dollar as significant impulses in the form of economic data from government institutions were temporarily absent. Consequently, markets are currently focusing on data from private providers, such as ADP surveys. These data showed somewhat stronger employment than expected (an additional 42 thousand jobs while the analyst consensus was 28 thousand), which, however, did not lead to a significant market reaction – the analysis states.

In such circumstances, Raiffeisen does not expect the EUR/USD to continue on a downward trajectory. – On the contrary, any signs of a persistently weaker U.S. labor market following a possible end to the government ‘blockade’ could lead to a noticeably weaker dollar. The same applies to the topic of Jerome Powell’s successor, which could gain significance by the end of the year. In this context, we maintain our year-end forecast of 1.17 dollars for the euro, and the risks around that forecast appear significantly more balanced than a few weeks ago – analysts believe.