The US government shutdown hangs on the edge, and the US dollar outlook faces a critical turning point

This Week’s Market Overview

Last week (11/3-11/7), the forex market remained stable with minimal volatility, and the US dollar index slightly softened, down by 0.16%. The performance of non-US currencies was mixed— the euro rose by 0.25%, the Japanese yen appreciated by 0.37%, the British pound edged up by 0.05%, while the Australian dollar declined by 0.81%.

Fed Rate Cut Expectations Rise, Euro Rebound Imminent?

Government Shutdown Fears Easing, US Dollar Under Pressure and Weakening

Last week, EUR/USD showed a pattern of initial decline followed by recovery, ending the week up 0.25%. The main driver was the dollar’s weakness, and the pressure from the US government shutdown on liquidity is gradually easing.

The market sent several negative signals: the US Challenger job cuts in October increased by 175% year-over-year, the highest in twenty years for the same period. Subsequently, the University of Michigan Consumer Sentiment Index in November hit a nearly three-year low, and investors’ expectations of a Fed rate cut cycle have significantly increased.

According to the latest data from the CME FedWatch Tool, the market now prices in a 62.6% probability of a rate cut in December, with a 37.4% chance of holding rates steady. This shift in expectations has directly contributed to the decline in the US dollar index.

Policy Shift Provides Support

The US Senate passed a temporary funding bill on November 9 to end the government shutdown, although final approval is still pending. Morgan Stanley’s research team believes that once the government shutdown is quickly resolved, the Fed will have sufficient economic data to support a December rate cut, with a probability exceeding 70%.

Short-term Trading Strategy

From a technical perspective, EUR/USD faces significant resistance around the 21-day moving average at 1.159, making further upward movement challenging. If the price repeatedly fails at this level, the risk of a short-term decline increases, with the recent low of 1.1468 serving as a key support. Conversely, a break above the 21-day moving average would open the way toward the 100-day moving average at 1.166.

This week, close attention should be paid to the progress of the US government shutdown and October inflation data. If CPI and PPI are released as expected, they could have a substantial impact on EUR/USD trading.

Japan’s Fiscal Policy Disrupts Markets, Yen Faces Persistent Depreciation Pressure

Safe-Haven Buying Short-term Support, Long-term Downtrend Unchanged

Last week, USD/JPY fell by 0.37%, mainly due to increased risk aversion. However, this rally was short-lived, as ongoing concerns over Prime Minister Fumio Kishida’s expansionary fiscal plans continue to exert downward pressure on the yen.

Institutional Forecasts: Yen to Devalue Significantly by Year-End

Latest forecasts from JPMorgan and Mizuho Securities point in the same direction— the yen is expected to depreciate sharply. JPMorgan estimates that by the end of December 2025, USD/JPY will fall to 156 (previously forecasted at 142), and Mizuho Securities also projects a level around 156.

Mitsubishi UFJ Bank chief analyst Tetsuo Ino commented, “Until the government’s final budget scale is confirmed, market caution regarding Kishida’s fiscal policies will persist, easily triggering a wave of yen selling.”

Intervention Risks Rise, but Short-term Action Less Likely

As the yen continues to weaken, the risk of intervention by the Bank of Japan increases. However, the consensus is that actual intervention in the near term remains unlikely. The last time Japan intervened to stabilize the yen was in July last year, when USD/JPY was around 160.

Technical Analysis and Trading Opportunities

USD/JPY remains above the 21-day moving average, with bullish momentum still intact. Breaking through last week’s high of 154.50 could open up a broader upward space. If resistance holds, the risk of a downward correction increases, with the 21-day moving average at 152.60 serving as a key support.

This week, focus on key releases of US economic data, speeches by BOJ and Fed officials, which could influence the USD outlook.