USD: Signs of a tentative shift
The US dollar index (DXY) slipped again on Monday, marking a second day of losses as the risk of a government shutdown in Washington weighed on sentiment. Without a deal by the end of the day, parts of the US administration could be forced to shut down, as Democrats and Republicans remain locked in dispute over healthcare spending and budget priorities. While markets do not typically treat these episodes as major drivers for currencies, the potential delay to this week’s labour market reports may blunt the dollar’s recent strength, which has been underpinned by robust economic surprises. Political stalemate serves as a reminder of how swiftly uncertainty can cloud the economic picture. If the situation drags on, it is likely to be mildly negative for the dollar.

That said, the greenback has been surprisingly resilient through September, with the DXY still 0.2% higher despite the Fed’s rate cut. Stronger data and hawkish guidance have tempered the impact of policy easing. The real test now lies in whether the improved dataflow can persist. Only then might the dollar break out of its broader bearish channel and sustain a recovery.

The upcoming non-farm payrolls release will be crucial. A weak print would reinforce the view that recent gains are merely a corrective move within a longer downtrend. Traders may look to reload long positions after any dip triggered by shutdown headlines, with an eye on the labour market to provide fresh momentum. Whether this proves to be a tactical trade or the beginning of something more lasting depends on whether incoming data continues to confirm economic resilience and justifies the Fed’s hawkish tone.

The week begins with JOLTS job openings, which are likely to provide the first steer for dollar direction given the heightened sensitivity to labour market indicators.

EUR: Dependent on Fed signals
The euro pushed higher against the dollar yesterday despite softer-than-expected inflation readings in Belgium and Spain, benefitting from dollar weakness linked to US political risks. We remain doubtful that these developments carry lasting weight for FX, and expect the move to fade if US employment figures later this week beat expectations.

Although eurozone inflation has been subdued, data due today from France and Germany, followed by the bloc-wide release on Wednesday, could lend some support to the single currency. Even so, the dominant driver will be US labour data.

For EUR/USD to reclaim its highs, markets would need a clearer dovish shift from the Fed. Back in June, when rate cut expectations picked up – though they did not materialise – the euro climbed to year-to-date highs near $1.1830. A similar move has unfolded this week, with $1.1920 printed as a new high. Whether this develops into a trend will depend on whether the Fed signals a broader easing cycle.

Should the Fed hold back again, as it has previously, the message would be one of continued caution. Despite some easing, inflation risks and a still-solid macro backdrop mean policymakers remain wary. That could cap the euro’s upside, with limited scope for further gains if Fed hawkishness persists.

GBP: Pound lifts, but the dollar story dominates
Sterling began the week on the front foot, with GBP/USD extending its rebound from the $1.3365–1.3323 support zone. Monday’s move suggests the recovery may stretch further, as short-term weakness is unwound and key technical levels hold. Options markets have turned less negative, with both 1-week and 1-month risk reversals showing a softer bearish bias. Nonetheless, positioning over the past year remains its weakest in six months.

The looming US shutdown remains the biggest risk factor, with the potential to weaken the dollar through greater economic uncertainty and tighter fiscal conditions. Should the greenback soften, cable may build on its recovery, already around 1% higher at $1.3437. Even so, the pair is still on track for its worst quarter of the year, down more than 2% after repeated failures to sustain moves above $1.37 during Q3.

Domestically, attention will also be on the Labour Party conference, where any push for more expansionary fiscal policies could fuel concerns about Britain’s borrowing trajectory. In an environment already weighed down by high debt, the UK may face tougher market scrutiny than some of its peers. If such worries resurface, gilts and sterling could come under pressure. Absent fresh domestic shocks, however, the dollar side of the equation will continue to call the tune – as is usually the case.