The end of the shutdown is a boost for the dollar and financial markets

The end of the longest shutdown in US history, a 43-day shutdown, brought significant relief to financial markets and the economy itself. The bill signed by President Donald Trump, which funded the federal government until the end of January, allowed for the return of normal government operations, the resumption of payments for over a million workers, and the release of macroeconomic data that had been suspended for weeks..

The currency market has breathed a sigh of relief, as the end of the shutdown reduces political risk, which has been a constant downward pressure on the dollar in recent weeks. Investors will soon regain a full picture of the US economy and will be able to re-analyze data on employment, inflation, and retail sales, allowing them to more accurately assess the prospects for the Federal Reserve's monetary policy.

Possibility of easing monetary policy

Previously, short-term shutdowns had little impact on the American economy, being perceived primarily as political incidents. This time, the scale of the paralysis is unprecedented. Withheld payments, delayed macroeconomic data, and the paralysis of numerous federal programs are imposing real costs on consumers and businesses. Combined with highly volatile foreign policy, tariff wars that sometimes escalate, sometimes are suspended, and uncertainty about inflation and the labor market, the question arises how long the economy will need to fully recover and how deeply it has been affected. Each subsequent macro data release, especially labor market and inflation reports, is now taking on exceptional importance, as it allows us to assess whether the American economy is able to regain its pre-crisis rhythm and whether the dollar will be able to regain its strength..

The Fed's decisions remain a key factor influencing the dollar's value. Currently, the market is considering the possibility of monetary policy easing in the coming months, although it does not expect drastic interest rate cuts in the near future. This means the dollar could experience temporary weakening pressure against the euro and yen, especially if macro data signals an economic slowdown or lower inflation.The central bank's rhetoric, the pace of data releases, and investors' interpretation of them will determine whether the dollar strengthens as sentiment improves or faces pressure from expectations of further monetary policy easing.

A boost for the dollar and financial markets

A mixed trajectory for the dollar can be expected in the six-month and full-year perspectives. On the one hand, political stabilization and the return to normal administrative functioning are acting as a catalyst for strengthening, while on the other hand, the long-term effects of the 43-day shutdown, including a possible slowdown in economic growth and an erosion of confidence in certain sectors, may trigger periodic corrections. The dollar will likely react to any signals on inflation, employment and Fed policy., and its exchange rate will reflect the simultaneous impact of the improved political sentiment and the real economic effects caused by the long-term administrative paralysis.

The end of the shutdown is a short- and medium-term boost for the dollar and financial markets, but the further trajectory of the US currency largely depends on the ability of the economy to recover, political stability in the US and how the Fed will balanced between the risk of an economic slowdown and the need to maintain control over inflationEach upcoming macroeconomic report will be crucial, and investors will need to closely monitor both the data and monetary policy signals to predict when the dollar will strengthen due to improved sentiment and when it will face pressure from expectations of further monetary easing.

At 10:00 a.m. we pay PLN 3,6390 for a dollar, PLN 4,2318 for a euro, PLN 4,5795 for a franc, PLN 4,7902 for a pound.

Source: Mikołaj Sobierajski, XTB