USD: Productivity Gains Mask Labour Market Weakness
The start of the week saw renewed volatility in global markets, led by a sharp decline in the Japanese yen following Takaichi’s election victory. The yen fell by around 1.6% against the dollar on Monday as her surprise win revived expectations for continued fiscal support and reduced speculation of an imminent rate hike from the Bank of Japan. The resulting uncertainty pushed both gold and Bitcoin to record highs in yen terms. Although Takaichi has previously criticised interest rate hikes, her tone has softened in recent months, suggesting that a full revival of the “Abenomics” era is unlikely, particularly with the LDP now governing as a minority.
Turning to the United States, interpreting the economic picture remains challenging due to the ongoing government shutdown, which has severely limited access to official data. S&P Global Ratings estimates the closure could subtract between 0.1 and 0.2 percentage points from GDP growth for every week it continues. Private data sources such as JOLTS, ADP, and Revello Labs indicate a stagnant but stable labour market characterised by minimal hiring and firing.
With limited official data, the Federal Reserve must rely on private indicators and anecdotal reports from businesses. Markets are currently anticipating a further 25 basis point rate cut before month-end. A key question for policymakers is how to reconcile slow job growth with forecasts such as the Atlanta Fed’s 3.9% Q3 GDP estimate. The answer appears to lie in surging productivity, driven by investment in technology and automation. Businesses are producing more output without expanding headcount, leading to higher GDP but muted employment growth. Labour market weakness also reflects demographic shifts, restricted immigration, and a lower “break-even” employment threshold. Overall, the US economy continues to expand efficiently, powered by capital investment rather than job creation.
GBP: Sterling Holds Firm Despite Continental Uncertainty
Sterling performed robustly on Monday, gaining around 0.4% against both the dollar and the euro. Political turmoil in France provided the pound with some breathing space, lifting GBP/EUR away from the 1.1450 support level that dominated the latter half of September. With little in the way of domestic data this week, sterling remains largely influenced by Bank of England commentary and developments across the Channel.
Despite a generally cautious stance, the BoE’s persistent hawkish tone should offer the pound some medium-term support. However, the recent break below its year-long upward trendline suggests sterling may face further volatility heading into the Autumn Budget. The GBP/EUR exchange rate briefly topped 1.15 yesterday, supported by euro weakness and investors’ perception that UK assets remain relatively stable compared with continental peers.
EUR: French Political Unrest Deepens Euro Pressure
The euro struggled to maintain stability following the resignation of French Prime Minister Sébastien Lecornu, who stepped down less than a month after his appointment. His departure follows the earlier resignations of François Bayrou and Michel Barnier, highlighting ongoing political dysfunction in France. The failure to pass a credible budget through a fractured parliament has reignited investor concern over the country’s fiscal outlook.
The widening yield gap between French and German 10-year government bonds, which reached 86 basis points on Monday, underlined this growing unease. French bond yields surged as investors demanded a higher premium to hold the country’s debt, while the euro fell across the board before recovering modestly later in the session. EUR/USD touched lows of around 1.1650 before rebounding to 1.17.
Although the European Central Bank is expected to prevent wider contagion within the Eurozone, the persistent uncertainty surrounding France’s leadership and fiscal policy continues to weigh on sentiment. With German industrial data remaining weak and confidence in EU reforms fading, the euro’s near-term outlook remains fragile.
Looking Ahead
Investors face a busy central bank calendar this week. The Federal Reserve will release the FOMC Minutes on Wednesday, followed by comments from Chair Powell on Thursday. The Reserve Bank of New Zealand is widely expected to deliver a 25 basis point cut midweek, while the Norges Bank and Reserve Bank of Australia are also set to speak.
In Europe, attention remains fixed on France’s political turmoil and the reaction of bond markets, while in the US, focus turns to how long the government shutdown might persist. For now, markets continue to balance resilient growth signals in America, political uncertainty in Europe, and a cautiously stable outlook for the pound.
