Dollar rally falters on shutdown risk

Equities and gold gain while dollar’s rally pauses; US partial government shutdown in focus, Friday’s NFP is delayed; Aussie benefits from hawkish RBA meeting; more hikes on the cards; Yen remains on the back foot, focus firmly on Sunday’s election;
XM Group | 218 days ago

Perform_Feb3.png

Markets stabilize after last week’s wild moves

Last week’s market rout already feels a long way back, as during Monday’s session, US equity indices recouped their recent losses, with the S&P500 index flirting with the 7,000 level once again. Similarly, gold is already up 11% from Monday’s low of $4,403, testing a key resistance point, which paused the sell-off during Friday's abysmal session. Meanwhile, oil is edging lower, as Iran appears ready for talks with the US.

These moves come amidst an impressive US dollar rally. Euro/dollar has declined from the five-year high of 1.2081 to the 1.1800 area in just four sessions, with the pair now firmly back inside the wider 1.1476-1.1829 rectangle. The lack of fresh bullish catalysts from the eurozone, coupled with fearful comments from ECB officials about euro/dollar strength, despite some bright spots like the final HCOB manufacturing PMI surveys, mean that this pair remains driven by the dollar’s fate.

It is evident that gold’s correction triggered some safe haven flows into the dollar, despite the market’s gradual distaste for the greenback. Notably, yesterday’s robust ISM Manufacturing PMI also propped up the dollar, confirming the strong momentum of the US economy and validating last week’s upbeat commentary from Fed Chair Powell. However, the rates outlook for the Fed remains steady, with two rate cuts almost fully priced in for 2026.

US federal government shuts down again

Not everything is suddenly awesome on the other side of the pond, though, as the US Federal government is again in a partial shutdown. There is a vote in the House scheduled for today in order to avert the second full shutdown in just three months, but it will be a close call. President Trump has already weighed in, trying to take advantage of divisions seen in the Democrats’ ranks.

The BLS has already announced that Friday’s nonfarm payroll report for January will be delayed, with investors wanting to avoid a repeat of the October-November 2025 period. A successful vote today, funding the government with more than $1 trillion and putting the issue to bed for a while, could mean that the NFP release takes place next week, limiting the damage.

Today’s light calendar allows investors to focus on the shutdown developments but also on Fedspeak. Richmond Fed President Barkin will probably try to put a hawkish spin on last week’s Fed meeting, but since he is not voting in 2026, Board member Bowman’s commentary could get more market attention, particularly if Warsh’s nomination comes up in the Q&A session.

RBA delivers hawkish hike

The aussie dollar is hovering at a three-year high against the US dollar, successfully recovering from Friday’s decline, as the RBA unanimously decided to hike rates by 25bps to 3.85% today. Governor Bullock et al. adopted a more hawkish tone compared to the December meeting, highlighting the material pickup in inflation pressures, partly due to temporary factors, with inflation seen above the 2-3% target for “a while longer” and the economy growing above its potential in the near term. Consequently, both the inflation and growth projections were revised higher, with the cash rate assumed to reach 4.2% by December 2026, around 35bps above the current rate.

The market is pricing in 38bps of additional tightening in 2026, with the next rate hike fully priced in for August, although a case can be made for the next rate move to take place during the second quarter of 2026.

Dollar/yen on the move

Japanese officials continue their verbal interventions as, after dropping to a three-month low, dollar/yen has quickly rallied to the 155 area, confirming expectations for a price action similar to the April 2024 moves, when the drop due to a BoJ intervention proved very short-lived.

The focus is gradually shifting to Sunday’s general election. A comfortable win by the current governing coalition could spell trouble for the yen, forcing the BoJ to actually intervene, with or without the US Fed’s assistance.

Calendar_Feb3.png

XM Group
Type: Market Maker
Regulation: FSA (Seychelles), FSC (British Virgin Islands), CySEC (Cyprus), FSC (Belize), DFSA (UAE), FSCA (South Africa), FSC (Mauritius), CMA (Kenya)
read more
S&P 500 Stepped From Record Highs, but Market Breadth Is Flashing a Warning 💥

S&P 500 Stepped From Record Highs, but Market Breadth Is Flashing a Warning 💥

S&P 500 stepped from recent record highs, but its internal strength is deteriorating as fewer constituents hold above their 50-day averages. With September seasonality, elevated yields and Fed uncertainty creating near-term risks, market breadth is flashing caution. Yet a stronger fourth quarter and pre-election positioning could provide the next bullish catalyst.
Headway | 9h 59min ago
Dollar slips, yen surges as Middle East tensions escalate

Dollar slips, yen surges as Middle East tensions escalate

Oil rally persists, as military operations in the Middle East resume; Dollar fails to benefit from risk-off; euro/dollar rises towards 1.1650; Yen gains continue, courtesy of Bessent’s commentary, but move looks stretched; Equities remain in limbo, edging lower; gold bounces off $4,400;
XM Group | 14h 13min ago
Oil Surge Pressures US Stocks as Markets Await Inflation Data

Oil Surge Pressures US Stocks as Markets Await Inflation Data

🛢️ Iran targets US Navy vessels, US strikes Iranian tankers near Kharg Island — Brent approaches $100 at $99.05, WTI at $94.04. Oil +8% in September. Dow drops 628 points. Goldman raises December Brent forecast to $85. JPY strengthens on BoJ hike bets. ADP and Lagarde speech due today.
CPT Markets | 14h 14min ago