Jobs and shutdown fears weigh on the US Dollar

Last week ended on a positive note despite fresh tariff threats on pharma, trucks and kitchen cabinets. PCE data coming in line with expectations helped keep investor mood sweet after a week of hesitation. The S&P 500 rebounded after a three-day retreat, the Stoxx 600 held above its 50-DMA, and even the pharma-heavy SMI index bounced from August lows – confirming that trade news has become usual bad news. There’s no guarantee tariffs will stay, and no guarantee they won’t be doubled; they’ve simply become an increasingly meaningless negotiation tactic, just another bump in the road.

The bigger picture remains unchanged: tariff risks exist, they weigh on global growth prospects, they hurt global trade, they will lead to revised supply chains and a more divided world – but their direct market impact has weakened. US inflation and jobs matter more, because it’s up to the Federal Reserve (Fed) to keep the bullish trend in check. Rates are being cut, and if things got ugly, the Fed would be the one buying government bonds. On that front, news is encouraging. Last week’s impressive 3.8% US GDP growth sounded alarm bells and raised questions about the necessity of further Fed cuts. But Friday’s PCE data came in *right* on target. Personal income and spending rose more than expected, but the Fed’s preferred inflation gauge, the core PCE index, held steady at 2.9%. That’s significantly and persistently higher than the Fed’s 2% target. But the Fed will tolerate higher inflation as the combination of ample fiscal support and ballooning US debt points to structurally higher inflation (all that money has to go somewhere).

And speaking of jobs and debt – investor attention now shifts to US jobs data this week and a potential government shutdown on October 1. For jobs, the US economy is expected to have added around 50K jobs in September, with wages up 0.3% and unemployment steady at 4.3%. A weaker-than-expected print would keep alive expectations of two more Fed cuts this year, putting pressure on short-term yields and the dollar while supporting equities. Stronger-than-expected numbers, on the other hand, could reduce the odds of two more cuts, support the dollar and cap equity appetite near record highs.

But that data may not be published if a government shutdown materializes. Should Congress fail to strike a deal, we could see both stocks and the dollar under pressure, alongside renewed stress at the long end of the US yield curve. Still, a last-minute deal is more likely than not, and shutdown scares have usually ended up as non-events. Even in the rare cases they caused market disruption, the dips proved attractive to buy – after all, the US government can’t stay shut forever.

Meanwhile, uncertainty is helping gold to fresh records. The metal kicked off the week above $3,800 per ounce, while silver continues its exponential rise as investors shun the dollar and US debt. The precious metals rally is not just a short-term allocation story – trend-followers are in control, and the trend is strongly positive.

Despite that risk-off note, the week starts with a positive tone. European and US futures are in the green. In China, stocks are higher after industrial profits rose 20% year-on-year in August. The Hang Seng is better bid too, boosted by another 3% jump in Alibaba shares. The AI rally across Chinese stocks remains a major theme, with Alibaba carrying the mascot’s torch. A rally toward the 200 mark looks increasingly on the cards, with room to extend further.

In FX, the US dollar is downbeat on dovish Fed expectations ahead of jobs data and amid shutdown risks. The EURUSD held above its 50-DMA last week. Starting today, eurozone countries will release their September preliminary inflation prints. On Wednesday, the aggregate CPI is expected to tick up from 2% to 2.2%. That should cement the idea that the European Central Bank (ECB) is done cutting rates. But since that’s largely priced in, direction will come more from the dollar. A soft jobs print or a shutdown could fuel a retest above 1.18, while strong jobs data and no shutdown should maintain resistance at that level.

Elsewhere, the Reserve Bank of Australia (RBA) is expected to keep rates unchanged when it meets tomorrow, and US crude is trading above the key $65pb level, with rallies seen as selling opportunities amid news that OPEC will continue restoring supply in November.