US shutdown rattles markets as investors turn to gold

The United States government has entered its first shutdown in nearly seven years and the third under President Donald Trump. The move is already reverberating through global markets. Asian equities and US futures slipped as caution spread, while European equity contracts edged higher, pointing to regional divergence in sentiment. Gold is once again in demand as investors seek a traditional safe haven.

Currency markets are also feeling the strain. The US dollar has come under pressure, weighed down by concerns over the credibility of government institutions and the likelihood that the release of key economic data, including Friday’s jobs report, will be delayed. Past shutdowns offer mixed lessons. In 2013 the dollar experienced brief volatility before strengthening once the situation was resolved, while during the 2018 to 2019 shutdown the dollar index fell around two per cent before recovering once a deal was reached. These episodes highlight how sensitive the greenback can be to shifting headlines.

The shutdown has forced the suspension of non-essential services, affecting hundreds of thousands of federal workers. President Trump has hinted that this could pave the way for permanent reductions in staff numbers, raising the potential for deeper economic consequences. With Democrats and Republicans still locked in confrontation, there is no sign of resolution. The interruption also risks delaying data that is critical to the Federal Reserve’s decision-making, leaving policymakers with less clarity ahead of their late-October meeting.

Recent economic releases have painted a mixed picture. August job openings came in stronger than expected, signalling resilient demand, but hiring slowed and unemployment edged higher. The rise in openings has not translated into stronger payroll growth. At the same time, consumer confidence fell to its lowest level in five months during September, with the Conference Board survey highlighting a sharp drop in the share of Americans who see jobs as plentiful. Historically, this measure is a leading indicator of unemployment, suggesting workers may be sensing weakness before it becomes visible in official data.

The contrast between headline resilience and weakening sentiment hints at a labour market that may be losing momentum beneath the surface. This could weigh on growth and reinforce expectations that the Fed will maintain a bias towards easing into the year-end, undermining the dollar’s recent rebound.

Euro eyes test of $1.18 as dollar weakens

The euro closed September and the third quarter slightly lower against the dollar but remains more than thirteen per cent higher for the year to date, its strongest nine-month performance since 2017. Short-term momentum has softened and EUR/USD continues to be dictated largely by developments in the United States. With the shutdown now in progress, a test of the $1.18 level looks possible this week if pressure on the dollar persists.

Within the eurozone, inflation data is drawing close attention. Preliminary September figures from France and Germany showed headline inflation rising to 2.4 per cent year-on-year, the highest since spring, while German core inflation edged up to 2.8 per cent. These readings support the European Central Bank’s cautious stance. Broader German economic data, however, suggests that inflation may not remain the primary challenge. With a stronger euro and favourable energy comparisons, inflation is likely to drift back towards, and potentially below, the two per cent threshold in the coming months.

Looking at the gap between eurozone and US core inflation, and overlaying year-on-year moves in EUR/USD with a six-month lag, there is an argument for a sharp reversal in the pair in the months ahead. For now, the immediate question is whether the $1.18 level will be breached in the near term.

While the euro’s performance this year has been impressive, its short-term path remains heavily tied to US events, with eurozone data providing only limited support.

Sterling holds above 1.34 as focus turns to UK fiscal outlook

Sterling is holding steady above 1.34 against the dollar, supported by the weakening US currency and despite underwhelming JOLTS data and weaker-than-expected US consumer confidence.

The UK Labour conference produced little to shift markets, with its emphasis placed more on political direction than on economic policy. Shadow Chancellor Rachel Reeves reiterated that income tax, VAT and employee national insurance will not rise in the next budget, while underlining her commitment to the fiscal rule. This will be seen as reassuring, given that higher taxes have already been shown to dampen growth prospects and could make adherence to the rule even harder by restricting organic revenue growth and increasing reliance on measures that carry higher risks.

Uncertainty remains. The Office for Budget Responsibility is expected to deliver its latest forecast later this week, with reports suggesting a downgrade to long-term UK productivity growth from the current 1.1 per cent. Even a modest revision could widen the fiscal gap, challenging Labour’s pledge to fund day-to-day spending entirely from tax revenues. Should this materialise, the government may face pressure to reconsider tax increases in the Autumn Budget, potentially weighing on fiscal credibility and sterling sentiment.

Attention today will also turn to the final September manufacturing PMI from S&P Global, which is expected to confirm the provisional figure of 46.2, marking the sharpest contraction since April.