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The US government shutdown looks likely to end in the coming days, with a House vote now the final hurdle. The implications for FX are mostly visible in high-beta currencies, and there are no clear-cut directional implications for the US dollar. Meanwhile, soft UK jobs data should endorse more dovish repricing of BoE expectations ahead of the Budget
USD: No Clear Impact from Re-Opening
The US Senate passed a bill to end the government shutdown yesterday. The House will vote in the next couple of days, and while a majority isn’t fully guaranteed, expectations are that the bill will pass.
The government reopening trade has taken the shape of textbook risk-on moves in FX. The most equity-sensitive currencies are following gains across stock markets (AUD and NZD, leading) and the yen is under pressure. On a broad level, the impact on the dollar has so far been neutral, which is in line with the reaction to the beginning of the shutdown in October.
We think there will be little sense of direction in the coming days: reopening prospects allow markets to price out the negative growth impact, but a resumption of data releases in the US does carry non-negligible downside risks to the dollar. In our view, the latter factors should prevail, as we think markets are underestimating the downside risks for the labour market, US front-end rates, and – by extension – the dollar into year-end.
But it will take time to see those data releases, even if the government reopens in the coming days. High-beta currencies might have a bit more juice to squeeze, but overall, we don’t see this as a volatility-inducing event in G10 and expect the dollar to stay rangebound with some downside risks today.
EUR: Still a Bit Cheap
EUR/USD remains around 1% undervalued according to our short-term fair value model. That shows that the rally in the dollar – net of last week’s correction – has still exceeded what can be justified by market drivers like rates and equity differentials. However, the euro is lacking bullish thrust and – as discussed above – a potential end to the US shutdown is not a clear-cut USD negative.
Today’s eurozone calendar includes the ZEW surveys in Germany. These have not sent the kind of optimistic vibe of the Ifo, and consensus is looking at a modest improvement to 41 in the expectation index and to -78 in the current situation index.
We continue to look at 1.150 as a floor and see room for stabilisation close to 1.160 based on our short-term valuation indicators, but the probability of a major revamp in depressed EUR/USD volatility remains low this week.
GBP: Dovish Vibes from Jobs Market
This morning’s UK jobs numbers came in on the soft side. Unemployment rose to 5.0% in the three months to September (exp. 4.9%) and October’s employment contracted by -32k, following a revised -32k (first print was -10k) for September. Weekly earnings slowed across the board, with the headline (3M/YoY) measure undershooting expectations at 4.8%.
These aren’t screamingly dovish figures, but they do endorse to some extent the ongoing dovish repricing of Bank of England rate expectations. Remember that part of the BoE’s hawkish pivot in the summer was based on downplaying risks to the labour market whilst refocusing on inflation issues.
Now, both inflation and jobs data are starting to point down, and we think the Autumn Budget’s tax hikes will provide the final argument for a cut in December. Here is our market preview of the UK Budget.
EUR/GBP continues to face some upside risks as markets aren’t fully pricing in a December move (18bp this morning). However, the pair is already trading on the rich side as GBP embeds some risk premium ahead of the budget. Our year-end target remains 0.88.
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