Developments over the weekend suggest a potential resolution to the ongoing U.S. government shutdown, largely driven by concerns over significant flight delays during the Thanksgiving holiday and disruptions to food aid payments. A group of moderate Democrats has shown support for a proposed compromise bill in the Senate, signaling a shift toward a possible agreement. However, this compromise does not fully align with the Democrats’ demands, particularly regarding the extension of Obamacare healthcare subsidies, raising the possibility that House Democrats may still oppose the deal.
The upcoming 48 hours in Congress will be critical in determining whether this initiative gains traction. Markets have responded favorably to the news, with U.S. equity futures climbing nearly 1%, while Asian equity futures also showed strength on Monday. Analysts like Chris Turner from ING noted that the U.S. dollar index (DXY) is unlikely to regain levels above 99.90/100.00 in the near term.
In the foreign exchange markets, the Australian Dollar (AUD) appreciated by nearly 0.5%, with correlations to indices like the Nasdaq indicating a broader positive sentiment. Currently, the USD/JPY pair is trading above 154 as market speculation about a potential Bank of Japan rate hike is overshadowed by the yen’s role as a funding currency.
While some experts argue that concluding the shutdown could be a risk-on scenario that may weaken the U.S. dollar, the impact is expected to be more nuanced. The dollar has been under pressure recently due to job layoffs and concerns that continued government instability could lead to economic contraction in the fourth quarter. Concurrently, disappointing consumer sentiment data released on Friday further contributed to a bearish outlook for the dollar.
This week is expected to be relatively quiet in terms of U.S. economic data, as the nation will observe Veterans’ Day tomorrow. The attention will shift to the release of the NFIB small business optimism index and speeches from several Federal Reserve officials. Currently, the likelihood of a 25 basis point rate cut by the Fed in December has decreased to 64%. Without compelling economic data, this probability may fall to around 50%, as Fed officials are likely to advocate for a cautious approach to rate reductions. In this context, if the DXY’s previous high of 100.36 is to remain significant, it is unlikely that the index will surpass the 99.90/100.00 thresholds in the immediate future.
