The USDJPY currency pair looks to break the all-important 155 level, showing how all the economic dynamics listed above continue to play market havoc. The U.S. now confronts continued chaos from a possible government shutdown. In the face of even very disappointing economic statistics, the dollar’s resilience is the most salient feature. The Federal Reserve’s dovish turn, especially under Jerome Powell’s leadership, has turbocharged expectations for rate cuts to come.
Last month, the Institute for Supply Management (ISM) announced a drop in their Purchasing Managers’ Index (PMI). It fell from 49.1 to 48.7. The ISM PMI has now been under the neutral 50 mark for eight consecutive months. This trend is a pretty clear harbinger of trouble in the manufacturing sector. This long-running contraction is one of the most concerning developments for U.S. economic prospects. Such a scenario has fueled widespread conjecture that the Fed would have to recalibrate its policy orientation on interest rates.
It gets even trickier when you consider that market futures are pricing in a Federal Reserve rate cut by next May. But with the government shutdown still largely in place, the chances of an immediate rate cut are fading. That trend usually puts upward pressure on the dollar. Powell’s comments broach a great deal of uncertainty that should make us all take a longer look before shifting monetary policy in dangerous directions.
The euro has been buoyed by positive developments on the political front in France. The Socialist party’s intention to grant the government additional time to formulate an acceptable budget has bolstered confidence in the eurozone’s fiscal stability. This support is countered by more general economic difficulties in the area.
The market is more fragmented than ever before. Prediction markets such as Polymarket and Kalshi are currently valuing the chance that the U.S. executive branch remains dormant until at least mid-November at 52%. Worries over inflation are still very high. This is evident from a recent Council unanimous decision putting on notice risks associated with increasing inflation. Overall, consumer prices have begun to decelerate since the peak in September. Nonetheless, non-farm employment data have straddled the contractionary line since January.
In Switzerland, consumer price increases have almost ground to a halt at 0.1%. This decrease has put international circles abuzz with the possibility that the Swiss National Bank (SNB) will soon return to negative interest rates. This new development has put downward pressure on the Swiss franc, as markets respond to such new economic reality.