Foreign Exchange Commentary

Summary

• After a record 43-day government shutdown, President Trump signed a short-term funding bill
• The DXY, which traded as high as 100, is now at 99.22 as risk-on sentiment emerges after the reopening
• CPI, PPI, and Retail Sales Data this week will likely be delayed; October jobs data also remains in jeopardy
• The Japanese yen is trading at nine-month lows, as markets digest potential stimulus measures
• The Bank of Japan may intervene in FX markets to stabilize the yen 
• EUR/USD has rallied 1.5% despite mixed eurozone data

Big Picture: Dollar Softens, Fed Remains Divided, Data Uncertain

After a record 43-day government shutdown, President Trump signed a short-term funding bill reopening the government Wednesday night after the House passed the measure 222-209. The bill will extend government funding through January 30th and extends SNAP (Supplemental Nutrition Assistance Program) funding through Sept 2026 among a few other annual spending bills. However, one of the core drivers of the shutdown, the extension of Affordable Care Act tax credits that were set to expire, was not included in the bill though there was a promise for the issue to be put to the floor to vote at a later date.

Now that the government is back open, markets are looking forward to fresh data on the state of the labor market and inflation. With October’s official employment and CPI data already delayed- and at risk of being incomplete, markets are continuing to rely on private indicators and Fedspeak which has remained mixed. After a strong October which saw the U.S Dollar Index (DXY) move from 97.8 through the psychologically important 100.0 level, the dollar index has sold off for 6 consecutive sessions, trading at 99.16 at the time of this publication. As MUFG research notes, the dollar has “paused its recent rally after meeting technical resistance.” Last month, after the October Federal Open Markets Committee (FOMC) meeting, the U.S. dollar saw a boost in value when Federal Reserve Chairman Jerome Powell hinted it wasn’t a foregone conclusion that the Fed will cut rates in December. However, it appears markets are reluctant to extend longs without new macro data.

On the inflation front, while October’s CPI report, scheduled for 11/13 was not printed, the Cleveland Fed’s “nowcast” tool estimated October’s YoY CPI at 3% and MoM up 0.2%. With inflation and the labor market moving in opposite directions (and neither in a positive way), it will be an eventful end of year for the U.S. dollar with volatility expected to rise.

Currently there is a 50% chance of a 25 basis point cut in December and the FOMC remains a split committee with dovish and hawkish factions emerging. On the dovish side, Fed Governor Stephen Miran says that CPI is backwards looking; he argues that the cooling housing inflation because of the Trump Administration immigration policies is easing pricing pressures and that current policies remain restrictive and create unnecessary labor-market damage. As a result, he is pushing for multiple 50 bp rate cuts.

On the Hawkish side, speeches from Boston Fed Governor Susan Collins and Atlanta Fed Governor Raphael Bostic showcased public opposition for any further rate cuts. Bostic, who announced his intention to retire at the conclusion of his governorship in February 2026, said that surveys of businesses show that companies intend to raise prices next year. “I see little to no evidence that we should be sanguine about the forward trajectory of inflation,” said Bostic.

Japanese Yen Continues to Slide, Could See Intervention

USD/JPY is trading near 9-month highs as Japan’s new government, led by Prime Minister Sanae Takaichi, starts to take charge. On Wednesday, Japanese Finance Minister Satsuki Katayama said that she recently saw one-sided, rapid moves in the currency and that she’s watching FX markets with a high sense of urgency.

The Japanese yen which was trading as low as 140 against the dollar in April, has seen elevated levels of weakening as the market reacts to Prime Minister Takaichi’s’s potential stimulus package worth $100 billion. Concerns that Takaichi’s government, which calls for flexible spending to support lackluster Japanese growth (GDP for Q2 expanded 0.5%) are driving concerns for a country already battling sticky inflation - In September, core inflation came in at 2.9%.

While the Bank of Japan continues to remain cautious on tightening and is expected to hold rates neutral this year, the yen is already in intervention zones, with prior action in 2022 occurring when the yen hit 145 and then again at 152. Analyst estimates place 157 as a trigger point for BOJ intervention though a dovish BoJ and hawkish Fed argue against imminent moves as the two central banks are expected to make moves that point to a Japanese yen strength.

Euro Rallies for Fifth Straight Session

As the U.S. government shutdown ends and risk-sentiment returns, the EUR/USD has rallied, gaining 1.5% since November 5th and briefly hitting a two-week high at 1.1655 on Thursday.

In terms of fundamentals, eurozone data was mixed: Industrial production growth reported 0.2% MoM growth, steamrolling -1.1% estimates. German CPI, however, was above estimates with 0.3% MoM inflation vs 0.1% consensus. French employment came in at 7.7%, just slightly above estimates of 7.6%. France however, surprised GDP expectations as the economy grew 0.5% QoQ despite political turmoil.

October’s headline inflation for the ECB declined to 2.1% in October from 2.2% in September, moving inflation closer in line with the ECB target, in a speech, the ECB’s Isabel Schnabel said that inflation risks were “tilted a bit to the upside” and that she’s “not panicking.” With stable employment levels, sitting at 6.3%, the ECB is not likely to move interest rates anytime soon which should present positive momentum for the euro against the dollar as the Fed remains in its cutting cycle. As Schnabel says, ECB rates are “absolutely” in a good place.