During the previous shutdown, investors discussed the slowdown in US GDP growth and the pause in the Fed’s monetary expansion cycle. What will happen this time? The chances of another government shutdown have risen sharply. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The odds of a government shutdown have jumped to 78%.
- The previous shutdown did not slow down US GDP growth.
- The Fed is currently pausing.
- Long positions on the EUR/USD pair formed at 1.1835 can be kept open.
Weekly US Dollar Fundamental Forecast
It feels like financial markets are doomed to repeat the same mistakes. The shooting in Minneapolis caused Democrats to react strongly. Even those who opposed the government shutdown in the fall are now criticizing Donald Trump for his anti-immigration policy. The repetition of that story is adding fuel to the EUR/USD pair’s rally.
Republicans have a majority in the Senate with 53 seats to 47, but 60 are needed to avoid a shutdown. Before Minneapolis, the issue of extending the government’s work until September seemed resolved. However, the shootings and protests forced Democrats to demand a separate review of the Department of Homeland Security’s funding. As a result, the chances of a shutdown after January 31 jumped to 78% on Polymarket.
Chances of Another US Government Shutdown
Source: Bloomberg.
As with tariffs, investors have a very recent template to follow. It can also be used to trade the EUR/USD pair. In September, ahead of the previous government shutdown, there was a lot of talk that it would slow down economic growth in the US. Previous cases were cited as examples. In 2018–2019, the shutdown lasted 34 days, resulting in the dismissal of 340,000 employees and a 0.4 percentage point decline in GDP in the first quarter of 2019. The 16-day shutdown in 2013 cost the United States 800,000 jobs and 0.6 percentage points of GDP.
Such comparisons pushed EUR/USD quotes higher. However, the situation then changed dramatically. Investors believed that the government shutdown would increase the risks of a prolonged pause in the Fed’s monetary expansion cycle. This benefited the US dollar. In fact, there was no slowdown in US GDP. However, the central bank did not pause its rate cuts despite the slowdown in employment growth.
Even without the shutdown, the Fed is now in a wait-and-see mode, the labor market has stabilized, and the economy is strong. This is confirmed by the surge in durable goods orders to six-month highs.
US Durable Goods Orders
Source: Bloomberg.
Will investors focus on the shutdown? The previous example showed that even the longest, 43-day shutdown of the US government did not affect the economy and the US dollar. It is quite likely that Donald Trump has calmed down for some time, and the markets need a new driver. As a result, the EUR/USD pair may rise a little further until the end of January, then it will likely embark on a downward trend.
Weekly EURUSD Trading Plan
The US dollar may start strengthening even earlier. Investors do not expect the Fed to cut rates. However, if Jerome Powell adopts a hawkish stance, everything will change. In this situation, those who opened long positions on the EUR/USD pair on a rebound from 1.1835 should maintain them. The rest would be wise to sit on the sidelines.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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