Forex Weekly Outlook: Euro Gains, Pound Firms, Dollar Pressured by U.S. Shutdown

Traders are also analyzing last Friday’s eurozone inflation data: the core Harmonized Index of Consumer Prices for September rose from 2.3% to 2.4% YoY and added 0.1% MoM, while the broader index increased by 2.2% and 0.1%, respectively. Inflation in the region shows mild growth, which aligns with European Central Bank (ECB) expectations — the regulator is nearing the end of its rate-cutting cycle. Investors remain more concerned about economic growth prospects and ongoing political tensions.

ECB President Christine Lagarde delivered a relatively optimistic assessment of fiscal policy last Friday, citing Germany as an example. She noted that the German government is currently pursuing higher spending, including on defense and infrastructure, which should yield results within the next two to three years. Earlier reports suggested that the Ministry of Defense plans to sign contracts worth about €83 billion by the end of 2026, most of them with U.S. partners. Meanwhile, EU citizens are facing a gradual decline in living standards, rising housing costs, and reduced social programs — most evident in France, where President Emmanuel Macron struggles to maintain Prime Minister Sébastien Lecornu’s government. Lecornu narrowly survived two no-confidence votes thanks to his softened stance on pension reform. Meanwhile, the U.S. dollar remains under pressure due to the ongoing government shutdown: last Friday, the U.S. Senate failed for the tenth time to approve a temporary funding bill, with 51 votes in favor — short of the 60 required.

GBP/USD

The British pound gains against the dollar, holding near local highs from October 7, updated on Friday. The pair is testing the 1.3440 level as traders evaluate October housing-price data from Rightmove Group Ltd. The annual index rose 0.1% after –0.1% previously, while the monthly rate slowed from 0.4% to 0.3%, reflecting softer inflation. Meanwhile, moderate pressure on the pound followed Bank of England Governor Andrew Bailey’s statement that the negative effects of Brexit will persist for a long time, while any positive outcomes will take longer to materialize.

The U.K. officially left the EU on February 1, 2020, following the 2016 referendum. Since then, its markets have undergone major restructuring, but recent global turmoil revealed lingering vulnerabilities. The European Commission’s decision to impose tariffs on steel and aluminum imports above quota levels could hurt the British steel industry, which exports about 70% of its output to the EU. On the global market, U.K. steel will struggle to compete with cheaper alternatives from China and Russia, even under sanctions. Additionally, the U.S. has imposed tariffs of its own while pressing the U.K. and EU to halt purchases of Russian energy. Last week’s cautiously positive macro data offered short-term support: August GDP rose 0.1% after a 0.1% decline, while industrial production increased 0.4% MoM but fell 0.7% YoY. In the U.S., the government shutdown since October 1 has limited new statistics, though traders noted a sharp drop in the Philadelphia Fed Manufacturing Index from 23.2 points to –12.8 points versus forecasts of 10.0 points.

AUD/USD

The Australian dollar strengthens against the greenback, reclaiming the 0.6500 level as traders react to data from China. China’s Q3 GDP growth slowed from 5.2% to 4.8% YoY but expanded 1.1% QoQ, beating expectations of 0.8%. Industrial output in September rose from 5.2% to 6.5%, exceeding the 5.0% forecast, while retail price growth slowed from 3.4% to 3.0%. Nevertheless, the AUD remains under pressure following last week’s Australian labor report: employment increased 14.9K after –11.8K in August (forecast 17K). Full-time employment rose 8.7K, while part-time positions grew 6.3K — much slower than 36.7K previously. The participation rate improved slightly from 66.9% to 67.0%, and unemployment climbed from 4.3% to 4.5%, contrary to expectations. These figures could pressure the Reserve Bank of Australia (RBA) to reconsider further policy easing. Recently, the RBA maintained a hawkish tone and only recently dropped the option of another rate hike before year-end. Meanwhile, markets are almost certain the U.S. Federal Reserve will cut rates in October, possibly by 25 bps — and some analysts now expect a 50-bp move. Despite labor-market volatility, the U.S. economy still shows resilience.

USD/JPY

The U.S. dollar shows moderate gains against the yen, extending the bullish momentum from last week. The pair is testing 150.50 as traders await new catalysts. Investors hope for progress in budget talks between Democrats and Republicans on a temporary government-funding bill. The shutdown, ongoing since October 1, has seen the Senate reject such bills 10 times, though support is gradually increasing — 51 votes last Friday, short of 60 needed. President Donald Trump’s administration continues to pressure Democrats, but even large-scale layoffs in Treasury, Health, and Education Departments — affecting up to 10,000 workers — have not resolved the impasse. Each week of shutdown costs the U.S. economy an estimated $15 billion. Meanwhile, the yen found some support after Bank of Japan Governor Kazuo Ueda said a rate hike in October remains possible, although the bank is still gathering data. Japan also faces upcoming prime-minister elections on October 21. Liberal Democratic Party leader Sanae Takaichi is favored to win, with reports suggesting a coalition deal with the Japan Innovation Party that would give 231 seats — just two short of a majority in the lower house.

XAU/USD

Gold prices edge lower, extending the correction from last Friday when the metal retreated from record highs near $4,380. Fundamental pressure on gold remains limited: investors are mainly taking profits while anticipating near-term rate cuts by the Federal Reserve. Most analysts expect a 25-bp cut in October, followed by another in December, though the probability of a 50-bp move has risen.

The dollar remains under pressure as the U.S. shutdown drags on; last week the Senate once again failed to pass a temporary funding bill, though support continues to grow. Meanwhile, safe-haven demand for gold stays strong amid global geopolitical risks. Tensions in the Middle East remain unresolved despite U.S. President Donald Trump’s claims of a peace deal, while the ongoing Russia-Ukraine conflict keeps straining European budgets. Finally, Trump’s announcement of new 100% tariffs on Chinese imports starting November 1 — a response to China’s rare-earth export policies — has added further uncertainty to global markets.