Shutdown shakes the dollar, euro steady, pound looks for fiscal lifeline.

• USD under pressure: The US government shutdown weighs on sentiment, with history pointing to softer dollar performance and steepening yield curves.

• Labour market risks: Potential federal layoffs and delayed data could worsen the slowdown in consumer and jobs confidence.

• Fed outlook: Cooling inflation and weaker jobs market strengthen the case for Fed cuts in October and December.

• Euro outlook: September CPI should keep ECB expectations anchored, but dollar weakness may lift EUR/USD.

• Pound in focus: UK fiscal credibility hinges on Reeves’ November budget—raising major taxes could stabilise sterling, but half-measures risk ongoing volatility.

USD: Growing headwinds for the greenback
As Francesco Pesole highlighted yesterday, the defensive yen has been the main beneficiary of the overnight US government shutdown. While FX reactions have been contained so far, markets are alert to the possibility of this becoming one of the longest shutdowns in decades, with past episodes lasting between three and 35 days. Democrats appear to be positioning themselves as defenders of healthcare ahead of next year’s mid-terms, while Republicans, with control of Congress and President Trump’s executive clout, will continue to test the limits of gridlock.

History offers some guidance: shutdowns have often led to a modestly weaker dollar, steeper US yield curves, and mixed equity performance. Today, S&P futures point to a 0.5% dip. More worrying for FX is the backdrop—falling US consumer confidence and a weakening labour outlook. If Trump follows through on threats to fire (rather than furlough) non-essential staff, as many as 150,000 jobs could be lost, with knock-on effects for payrolls. On top of that, economic data releases such as jobless claims and payrolls are now at risk of delay.

For today, ADP employment (+50k expected) and ISM manufacturing (sub-50 still likely) should still print, with ISM’s prices-paid component watched closely. Our base case is that softer labour markets, cooling rents, and fading goods inflation will allow the Fed to deliver rate cuts in both October and December.

Technically, DXY could slide towards 97.20, while USD/JPY may gravitate to 147.00/147.20, with weaker equities adding further downside pressure for the dollar.

EUR: Inflation won’t shift ECB expectations
Christine Lagarde’s latest speech was interpreted as leaning dovish, despite saying the ECB is in a “good place.” German data has softened, and the market hasn’t fully ruled out one more rate cut. September eurozone CPI is expected at 2.2% YoY, with core unchanged at 2.3%.

Still, the bigger driver today is the US shutdown narrative. Softer dollar momentum could help EUR/USD push towards 1.1800–1.1820.

GBP: Labour’s fiscal choices keep sterling in the balance
Labour’s annual conference had potential to spook investors, but markets are taking a surprisingly constructive view. While calls for higher spending were aired, no major new policies emerged. Economists like Dean Turner (UBS) argue the UK’s relative fiscal strength could reassert itself if the government stays the course, particularly with Chancellor Reeves hinting at bold tax moves in the November budget.

Crucially, senior figures no longer reject the possibility of raising key revenue-rich taxes—income tax, VAT, and national insurance. This could secure the £30bn gap needed to meet fiscal rules and reassure bond markets.

If Labour bites the bullet on “untouchable” taxes, sterling could stabilise and recover, especially versus the euro. But if the government opts for piecemeal tweaks on pensions, investments, or business levies, uncertainty will linger, prolonging sterling’s struggles.

Goldman Sachs warns GBP/EUR could slip to 1.11 on fiscal concerns and deeper-than-priced BoE cuts. GBP/USD, meanwhile, looks steadier thanks mainly to dollar weakness rather than UK strength.

The November 26 budget looms as the next big test—until then, expect volatility to persist.