Financial markets delivered a volatile week marked by contrasts. While the greenback extended gains as the Fed maintained a hawkish stance and the U.S. government shutdown dragged on, keeping risk sentiment cautious, the British pound showed unexpected strength, defying broader dollar momentum. The Reserve Bank of Australia and the Bank of England added to the intrigue with decisions that diverged from market expectations, catching traders off guard. Meanwhile, both gold and crypto markets echoed the uncertain macro backdrop.
Key factors:
🔹Strengthening Fed position: The Federal Reserve continues to maintain a tighter monetary policy stance than previously anticipated, providing renewed bullish momentum for the US dollar. The revised interest rate projections serve as a strong supportive factor for the USD, outweighing the influence of most other developments.
🔹Prolonged shutdown: The US government remains in a state of shutdown, now surpassing previous records in terms of duration. Despite this, Congress has shown limited urgency in reaching a compromise. According to polling data, Democrats appear more confident and are attributing responsibility for the impasse to Republicans. Although the absence of key economic data complicates accurate assessment of the situation, it has not hindered the dollar’s upward trajectory.
🔹Ignoring positive data: Financial markets largely disregarded the robust ISM Services PMI and ADP employment report published on Wednesday. This highlights the prevailing dominance of the Federal Reserve’s policy stance in shaping investor sentiment and sustaining dollar strength.
Bottom Line: The US dollar continues to lead the way in the foreign exchange market, bolstered by the Federal Reserve’s hawkish tone and the influence of updated rate forecasts. Although the government shutdown presents economic concerns, it has yet to undermine the prevailing bullish trend in the USD.
Key factors:
🔹BoE decision: The Bank of England maintained its key interest rate at 4%, as widely anticipated. However, the Monetary Policy Committee (MPC) vote revealed a dovish surprise: four of the nine members supported a rate cut, whereas only three had been expected. This indicates the central bank was on the verge of initiating policy easing.
🔹Mixed market reactions: In spite of the dovish shift and a prior three-week decline in the currency, the British pound strengthened on Thursday. This market behavior appears counterintuitive, particularly in light of elevated inflation (3.8%, nearly double the central bank’s target) and persistent weakness in the UK economy.
🔹Ignoring downside factors: The pound overlooked not only the dovish signals from the Bank of England—which, under normal circumstances, would have amplified downside pressure—but also the strong US economic data released on Wednesday. As a result, the current trajectory of the GBP/USD exchange rate does not align with traditional market logic.
Bottom line: The British pound is showing an unexpected appreciation, defying dovish policy signals and broader fundamental headwinds. The GBP/USD pair has moved beyond its established sideways range, suggesting a possible trend shift. However, the market’s behavior is currently seen as irrational, especially following a 700-pip decline with no clear fundamental catalyst.
Key factors:
🔹Reserve Bank of Australia decision: On Tuesday, the Reserve Bank of Australia (RBA) held its benchmark interest rate steady at 3.6%, in line with market expectations. This decision followed a third-quarter inflation reading that unexpectedly exceeded the central bank’s target range.
🔹RBA governor's hawkish comment: RBA Governor Michelle Bullock stated that the Bank’s current stance was close to neutral and that future decisions would be made on a meeting-by-meeting basis, depending on economic conditions. The market interpreted this as a hawkish signal, suggesting caution in easing policy further and heightened concern over persistently elevated inflation.
Bottom line: The Australian dollar had a muted response to the RBA’s hawkish signals, which under different circumstances might have provided support. That being said, the broader dominance of the US dollar in the foreign exchange market limited the AUD’s potential for a meaningful rebound.
Key factors:
🔹Reversal in favor of the euro: On Thursday, the EUR/USD pair unexpectedly shifted in favor of the European currency, climbing and consolidating above the 76.4% Fibonacci retracement level at 1.1517. This technical development created room for a potential continuation of gains toward the 1.1594 mark.
🔹Ignoring weak reports: The euro’s appreciation occurred despite the release of weaker-than-expected economic data from the Eurozone that same day. This suggests that the recent price movement lacks substantial macroeconomic backing.
🔹Impact of the US shutdown: The ongoing government shutdown in the United States, which has now surpassed previous records in duration, continues to pressure the US dollar. Analysts point out that the Republican Party may face mounting public pressure, as polling indicates they are largely held responsible for the deadlock.
Bottom line: The EUR/USD pair is demonstrating upward momentum in the absence of solid European economic fundamentals. The movement appears to be supported by technical factors and a drop in dollar strength linked to the prolonged US government shutdown.
Key factors:
🔹US employment data: Gold prices stabilized just above $3,980 per ounce after gaining 1.2% on Wednesday. This movement followed ADP Research’s report indicating a modest increase of 42,000 jobs. The data slightly eased concerns about a rapid economic downturn but did little to dispel broader recession fears.
🔹Uncertainty and safe-haven asset: The continued rise in gold underscores persistent uncertainty in the global economy. Investors are allocating capital to gold as a traditional safe-haven asset, seeking shelter from market volatility.
🔹Fed Policy and rate cut expectations: Federal Reserve Chairman Stephen Miran, known for his dovish stance, reaffirmed the need for interest rate cuts. The possibility of a more accommodative monetary policy by late 2025 supports the outlook for gold, as lower rates tend to benefit non-yielding assets like precious metals.
🔹Data delays: The ongoing US government shutdown—now the longest in history—is delaying the release of vital economic indicators. This lack of official data complicates the Federal Reserve’s policy decisions and impairs an accurate assessment of current economic conditions.
Bottom Line: Gold is holding steady after its recent climb, remaining sensitive to labor market reports and evolving Fed policy signals. While economic uncertainty and expectations for monetary easing continue to drive demand for gold as a safe-haven asset, the broader picture remains clouded by incomplete data.
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