The U.S. resumes pressure on the U.S. dollar, but weak employment is hard to shake off cautious interest rate cuts

In Asian trading on Friday, the U.S. dollar index maintained a narrow range. As the U.S. government ended its historic shutdown, the U.S. dollar came under pressure and fell on Thursday. The U.S. dollar index fell 0.35% to 99.14. The euro rose 0.4% to $1.1638 against the U.S. dollar, hitting a new high since October 29. Traders are assessing the long-term impact of the shutdown on the dollar's credibility while awaiting the release of a backlog of economic data.

Analysis of major currency trends

U.S. dollar: As of press time, the U.S. dollar index is hovering around 99.26. The short-term trend of the U.S. dollar will depend on the quality of upcoming economic data and the clarity of the Federal Reserve’s policy path. The statistical gaps caused by the government shutdown may continue to affect the market's judgment on the health of the U.S. economy and bring uncertainty to exchange rate fluctuations. Technically, the 50-period moving average is trending flat, while the 200-period moving average still provides support near 99.00. If it can continue to break through 99.80, it may push the index to test the 100.35-100.65 range, which is consistent with the 23.6% Fibonacci retracement level. Relative Strength Index (RSI) readings around 45 indicate neutral momentum, but improving technical structure points to a gradual recovery.

Euro: As of press time, EUR/USD is hovering around 1.1628. European officials are discussing the establishment of a U.S. dollar fund pool to replace the Federal Reserve to reduce dependence on the United States. The yen continues to weaken, falling to its lowest level against the euro since 1999. Despite the "verbal warning" from Japan's Finance Minister, traders expect the Bank of Japan to raise interest rates in December with only a 24% chance. Technically, EUR/USDThe bearish tone is maintained even as sellers are having trouble pushing the pair towards the 200-day simple moving average (SMA) at 1.1368. The Relative Strength Index (RSI) shows buyers have regained some momentum but remains flat below the neutral 50 line, indicating bears remain in control. A sustained break below 1.1500 would expose the August 1 cycle low of 1.1391, reinforcing the broader downward trend. Conversely, a clear break above 1.1600 would change the short-term sentiment and open the door for a move towards 1.1700.

UK employment data showed unemployment at 5% and wage growth slowing, raising the probability of a Bank of England rate cut in December to 90%. Technically, the technical picture for GBP/USD remains biased to the downside, although sellers will need to drag the pair below 1.3100 to challenge the latest cycle low of 1.3010 set on November 5. A break below these two levels could expose the April 7 low of 1.2707. Conversely, a daily close above 1.3100 could see the pair remain subdued around 1.3100-1.3150 in the absence of catalysts due to the limited UK economic calendar and the US government shutdown.

Foreign exchange market news summary

1. Most local Fed voting www.uniff.orgmittees are not positive about an interest rate cut in December

Federal Reserve officials have recently spoken out intensively to discuss monetary policy. "Fed spokesperson" Nick Timiraos said that there are currently four local Fed presidents with voting rights (Boston Fed Collins, St. Louis Fed Musallem, Chicago Fed Goolsby, and Kansas Fed Schmid, who voted against the October interest rate cut resolution) and have not actively promoted another interest rate cut in December. Jin 10’s Note: The Federal Reserve rotates four regional Feds as FOMC voting www.uniff.orgmittees every year. Starting next year, the above four officials will lose their voting rights on the FOMC. The New York Fed has a special status and has permanent voting rights.

2. Fed Collins: It may be appropriate to keep interest rates unchanged for a period of time

This year's FOMC voting www.uniff.orgmittee and Boston Fed President Collins said on Wednesday that she believed the threshold for further interest rate cuts in the short term was "relatively high" due to concerns that inflation remains high. Collins voted for a rate cut last month. “Unless there are signs of significant deterioration in the labor market, I would be cautious about easing policy further, especially with the limited inflation data we have available due to the government shutdown... at the current high levelIn a highly uncertain environment, it may be appropriate to maintain policy rates at current levels for a period of time in order to balance inflation and employment risks. Her speech highlighted deep divisions within the Fed. Since the last rate cut, several voting and non-voting Fed officials, including Collins, have signaled increasing caution about cutting interest rates. Collins believes that short-term borrowing costs are currently in "mildly tight" territory, while financial conditions generally remain a tailwind for economic growth. The labor market has indeed slowed, but downside risks have not intensified since the summer.

3. The Swedish krona should remain strong because it will benefit from fiscal stimulus in Sweden and the euro zone, Francesco Pesole, an analyst at ING, said in a webinar. The Swedish krona generally has a higher positive correlation with euro zone sentiment than the euro itself, he said. Fiscal stimulus will be transmitted to the euro area economy in 2026. In Sweden, the fiscal stimulus package in 2026 includes tax cuts, and ING believes that there may be more fiscal expansion www.uniff.orgmitments before the September election. ING expects the Swedish economy to expand by 1.2% next year, with room to exceed expectations. The bank expects the euro to SEK to fall to 10.50 by the fourth quarter of 2026.

4. ECB Governing Council: The www.uniff.orgbination of fiscal stimulus and economic recovery has tilted inflation risks in the euro area to the upside

According to ECB executive member Schnabel, inflation risks in the euro area are tilted to the upside as the economy is gathering momentum and governments are starting to invest huge sums in military and infrastructure. Schnabel said: “My narrative is a recovering economy, the output gap is narrowing, and there is expected to be significant fiscal stimulus, which will stimulate the economy. Schnabel is currently seen as the most hawkish member of the management www.uniff.orgmittee. "This leads me to conclude that if there is any risk, it is that the risk is tilted to the upside," she added. The German official said she believed interest rates were at an "absolutely" appropriate level and that policymakers must remain vigilant against rising food costs that are "still quite strong" and the "stickiness" of service sector inflation. Schnabel said that overall, she was not worried about small deviations from 2% and downplayed potential downside risks.

5. Risk-free despite rumors of tax hikes UK inflation-linked bonds attract record bids

According to foreign media reports, data show Britain's sale of inflation-linked bonds attracted record orders, easing debt sustainability concerns ahead of this month's budget. Investors on Wednesday subscribed to more than 69 billion pounds of bids for a syndicate of 4.25 billion pounds of British debt. The sale is the last such bond sale before the budget on November 26. She is under pressure to increase fiscal space and recent reports indicate that she will raise taxes in October.Her best performance since then, which has attracted investors including Aberdeen, Fidelity International and J.P. Morgan Asset Management, has given her some breathing room.

Institutional Views

1. ING: Fiscal austerity will push up expectations of interest rate cuts and the pound still has room to fall

Francesco Pesole, an analyst at ING, said in a webinar that although fiscal risks have been digested before the budget on November 26, there is still room for the pound to weaken further. ING estimates that the fiscal tightening in the budget will reach 0.5% to 1% of GDP. Pesole said this could encourage markets to price in more rate cuts from the Bank of England, which would be negative for the pound. He also said growth expectations may also be revised downwards. Although GBP is currently selling expensively, we do not believe it will be attractive from a fundamental perspective over the next year.

2. ING: The dollar may fall due to the Supreme Court ruling

Chris Turner, an analyst at ING, said in a webinar that if the Supreme Court rules that there are questions about the legality of Trump's use of emergency powers to impose www.uniff.orgprehensive tariffs, the dollar may fall. He believes that this decline will be realized mainly through the potential impact on the US bond market. He said the loss of tariff revenue could lead to a sell-off in long-dated Treasuries. The suspension of tariffs will also benefit the rest of the world, supporting other currencies. However, he added that Trump may find other ways to impose tariffs.

3. www.uniff.orgmerzbank: Increased bond issuance in the United States and Europe will push up risk premiums

Analysts at www.uniff.orgmerzbank said in a report that increased bond issuance in the United States and Europe will prompt investors to demand higher risk premiums, thereby pushing up government bond yields and steepening the yield curve. They believe a steeper yield curve is expected on both sides of the Atlantic. However, with expectations for further interest rate cuts from the Federal Reserve, yields are unlikely to move significantly higher. www.uniff.orgmerzbank predicts that by the end of 2026, the German 10-year Treasury bond yield will rise to 3%, and the U.S. 10-year Treasury bond yield will hit 4.5%. According to data from Tradeweb, the 10-year German government bond yield rose 2 basis points to 2.675%, while the 10-year U.S. Treasury bond yield fell 2.3 basis points to 4.088%.

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