- French political instability and the US government shutdown continue to deteriorate the currency market risk sentiment.
- Shifting Fed expectations with a higher probability of two rate cuts by the end of 2025 continue to weaken the dollar.
- Japan’s politics weigh on the yen, supporting the US dollar.
Currency futures are experiencing a higher volatility as political shocks in France and the US government shutdown collide with central bank expectations. The Euro FX futures (6E) remain under pressure, shedding around 50 ticks from Monday’s opening price. The unexpected resignation of French Prime Minister Sebastien Lecornu has shattered confidence in the euro bloc, enticing short selling in 6E and cross-currency pairs.
Meanwhile, the US government shutdown continues to cap the dollar upside. With the threat of massive federal layoffs and continuing congressional impasse, the Fed’s rate cuts in October are almost certain, with a high probability for another cut in December.
In the UK, the GBP futures reveal a mixed scenario with cautious optimism. Though the dollar weakness provides a tailwind, the pound remains challenged by BoE policy uncertainty. The dovish expectations are keeping the currency under pressure while shifts in Fed expectations continue to balance the situation.
Diverging central bank policy rhetoric has added tension across the FX futures. Fed hawks such as Lorie Logan (Dallas President) have cautioned against over-easing. On the other hand, dovish members like Stephen Miran advocate for more accommodation. Futures markets are leaning towards the dovish narrative, as the CME FedWatch tool indicates a 95% chance of a 25-basis-point cut in October and an 84% chance in December. That shift limits the downside in euro and sterling while pressuring the dollar-based positions.
From Japan, the political factors are shaping up yen’s trend as the odds of the BoJ tightening are low after pro-stimulus Sanae Takaichi was elected as LDP leader. As a result, the JPY futures remain under selling pressure.
Futures traders should keep an eye on US funding talks and the French political situation, as these events could reprice the euro and pound contracts.