Pressure on the dollar is growing. The USD/JPY pair is trading lower and lower.

The defensive yen benefits most from the US shutdownFor a few days now USD/JPY pair has been steadily falling (currently at 147,25). While the currency market's movements so far have been moderate, investors fear that the current US government shutdown could be one of the longest in the last three decades. Historically, such shutdowns have lasted between three and 35 days. Democrats are consciously entering this dispute, wanting to be seen as the party fighting for the health care system in the perspective of next year's congressional elections.Republicans control the agenda, and President Trump is making extensive use of executive powers. Democrats' only real leverage remains the need for 60 votes in the Senate to pass government funding.

Experience from previous shutdowns shows that they usually led to an upward slope of the US yield curve, a slight weakening of the dollar, and mixed signals for the stock market. Currently, futures contracts for S & P500 indicate a decrease of 0,5 percent.

There's a clear deterioration in consumer sentiment in the US and a shift in perceptions of the labor market, with more and more Americans believing that finding a job is more difficult. The "shutdown" could deepen these trends, especially if Trump follows through on his threats and doesn't limit himself to temporary suspensions but instead fires some government employees. It's worth noting that up to 150 government jobs could be eliminated from the October NFP report as part of earlier austerity measures.

No Non Farm Payrolls Report

An additional concern is the lack of weekly unemployment claims and the September employment report. However, the market should see ADP data (consensus +50) and the ISM manufacturing index. Weaker results would increase the dollar's vulnerability to further depreciation. The baseline scenario assumes that tariff-related goods price inflation will be lower than previously feared, and softer trends in the labour and rental markets mean that services inflation is heading downwardsThis should give the Federal Reserve room to cut rates in October and December.

In this environment, the dollar index may head towards 97,0 and USD/JPY towards a level even lower than 147. Declines on Wall Street would additionally contribute to the weakening of the greenback.

Christine Lagarde's speech yesterday was perceived as somewhat dovish. Although the ECB president said the bank was "in a good place," she did not rule out a rate adjustment. Recent data from the German economy have been disappointing, and the market is not ruling out another rate cut by the ECB.Today's September inflation reading for the eurozone should show an increase to 2,2% year-on-year, with core inflation remaining at 2,3%.

However, don't expect these data alone to spark further strong growth in the EUR/USD. The dominant factor remains the history of a weaker dollar due to the US shutdown, which could push the exchange rate toward 1,18 or slightly above.

Source: OANDA TMS Brokers