When you see the light at the end of the tunnel, you leave caution behind. But the uncertainty doesn’t go away. What will this light be like? Bright or dim? Will the data show that the cooling of the US labor market in the summer was a temporary phenomenon? Or will it continue to freeze? After some time, one tunnel may be followed by another, because the plan approved by the Senate provides for the full opening of the government only until January 30. Unsurprisingly, the EURUSD is treading water.
Morgan Stanley and MUFG believe that the completion of the shutdown will weaken the US dollar, as new statistics will show a deterioration in the employment situation. This is indicated by alternative sources, but the Fed and investors need official data to make decisions. Their absence exacerbates the split in the ranks of the central bank.
According to Mary Daly, President of the Federal Reserve Bank of San Francisco, one should not make the mistake of keeping rates at a high level for too long. Inflation will not rise too high, and inflation expectations will remain fixed. At the same time, the cooling of the labor market gives the Fed grounds to continue the cycle of monetary expansion. FOMC member Stephen Miran is ready to vote for a 50bp cut in borrowing costs in December.
On the contrary, St. Louis Fed President Alberto Musalem expects the U.S. economy to accelerate in the first quarter after the shutdown ends. Therefore, the central bank should remain cautious in reducing interest rates. The futures market seems to have the same opinion. Derivatives offer a 62% chance of monetary policy easing at the end of 2025.
The lack of official statistics due to the shutdown led to a significant decrease in the volatility of the US dollar. Coupled with the high rates of the American debt market, this has allowed carry traders to flourish. According to Bloomberg calculations, the effectiveness of playing on the difference with greenback was higher than for most other assets. This was one of the reasons for the USD index’s 3% rebound after a 10% decline in the first half of the year.
The markets are concerned about several issues at once. Will the House of Representatives approve the opening of the Government approved by the Senate? Will the shutdown resume in February? What will be the data? At the same time, an increase in the volatility of the US dollar as they arrive will deprive it of an important trump card – support from carry traders.
However, statistics on employment and inflation are much more important. Based on it, the Fed will make decisions, and the chances of cutting the federal funds rate will change.
