Special update: US Government officially shut down

• The Senate failed to pass a bill to approve a funding extension through February 16th.
• USD fragility to be exacerbated by Government shutdown, EUR/USD heading for fresh highs.

At midnight Friday, and after the Senate failed to pass the bill earlier approved by the House, the US government shutdown officially began. The House passed a bill to extend the government funding until February 16th, but Democrats and Republicans couldn't agree over funding DACA and migrants' protection.

This shutdown means that many US government´s activities  will come to a halt until the funding for such activities is approved. Multiple non-essential offices will be closed, and their employees furloughed. The shutdown affects museums and national parks, but also health and regulatory agencies, some of which that will anyway remain open, but will work with a minimal staff.  

The US Federal Government experienced multiple shutdowns, the last in October 2013, a few months after Barak Obama took the office. This time the shutdown comes on the first anniversary of Trump's presidency.

Despite  Republicans are a majority in both chambers, Democrats still blocked the bill amid disagreements with Trump's policy over migration. This shutdown, clearly indicates how fragile his authority is,  and how much opposition Trump's has, even within his own party.

EUR/USD behavior back in 2013

Taking a look at the EUR/USD pair´s chart, back in 2013  it was trading at 1.3520 ahead of the shutdown, and gained some 150 pips in the next couple of days, but spent the rest of the shutdown in a consolidative phase between those  levels. When the shutdown ended, in October 17t, the pair soared to 1.3681, surpassing the immediate high post-shutdown, extending its rally later another 200 pips, to top at 1.3831 before changing route. Roughly 300 pips up during the shutdown.  Weekly charts show that the GBP and the JPY also gained against the greenback back then, but just modestly, with no significant moves in any of them. Wall Street kept rallying back then, ending those two first weeks of October 2013 with gains.

What to expect this time

The American dollar has been under selling pressure ever since mid-December, now trading at its lowest since December 2014 against the common currency, with the EUR/USD pair having closed the week at 1.2216, after topping at 1.2322. The latest rally seems overstretched, but the market had no reasons to return to the greenback. A big risk factor in the middle is the ECB's meeting that will take place next Thursday  and is quite probable that President Draghi will focus on down talking the EUR, as EU policymakers have clearly signaled that they don't want the pair above 1.2000.

Given dollar's fragility, there are good chances that this news will exacerbate the negative sentiment towards the American currency, and result in the EUR/USD pair jumping through the mentioned multi-year high of 1.2322, with the next relevant resistance coming  at 1.2460. However, and ahead of the ECB's the dollar may witness a sudden appreciation, triggered by profit-taking.