Political Tensions in France and Japan Support Dollar

The U.S. Dollar Index (DXY) rose by 0.65% to 98.38 points this week, while the EURUSD declined by 0.55% to 1.16740. This Dollar rally amid the ongoing U.S. government shutdown appears counterintuitive, as such periods typically weaken the Greenback. Indeed, following the shutdown on Wednesday last week, the EURUSD initially climbed 0.68% to 1.17780, approaching resistance at 1.17600–1.17800, a breakout above which would have confirmed a renewed rally toward the 1.19500–1.20500 zone. That bullish move was supported by weak September ADP Nonfarm Payrolls data, which showed a loss of 32,000 jobs versus expectations for a 53,000 gain. However, the Supreme Court’s decision to block the dismissal of FOMC member Lisa Cook, whom President Donald Trump sought to replace to push for faster rate cuts, temporarily halted the dovish narrative. The EURUSD ended last week at 1.17380, posting a 0.39% weekly gain.

The rally was capped early this week by political turbulence in both Japan and France. In Japan, the ruling Liberal Democratic Party elected Sanae Takaichi as its new leader, paving the way for her to become the country’s first female prime minister. Known for her support of accommodative fiscal and monetary policies, Takaichi is expected to pause further Bank of Japan rate hikes. As a result, the USDJPY surged 2.24% to 150.78 this week, leaving a gap at 147.50 that will likely be closed eventually, though the timing remains uncertain. Meanwhile, in Europe, the EURUSD opened Monday with a gap up at 1.17370, which could have been filled that same day, but political turmoil in France deepened after Prime Minister Sébastien Lecornu resigned less than a month into his tenure, the third government resignation within a year. This instability in the EU’s second-largest economy weighed heavily on the Euro, pushing the EURUSD down by as much as 0.74% to 1.16510 on Monday.

The combination of political uncertainty in Japan and Europe has significantly limited the Dollar’s downside potential. Immediate support for the EURUSD now lies at 1.16500–1.16700, and a decisive break below could open the way for a deeper decline toward 1.15000–1.15500 or even lower. Still, given the open gap and the ongoing U.S. government shutdown, such a move remains less probable for now.

Looking ahead, the Minutes from the Federal Reserve’s September meeting, due on Wednesday, could pressure the Dollar if they reinforce the dovish tone from the last policy discussion. However, on Thursday, Fed Chair Jerome Powell is scheduled to speak again. His recent hawkish remarks have lent support to the Greenback, but given the weak labour data, cooling business activity, and the negative effects of the shutdown, Powell might strike a more cautious, dovish note, though his stance remains uncertain. Thursday could therefore become the pivotal day of the week for the currency market.

Large investors continue to show confidence in the Dollar. Last week, they purchased $5.2 million worth of shares in the WisdomTree Bloomberg US Dollar Bullish Fund (USDU), bringing total bullish exposure since early August to $20.7 million. This indicates persistent expectations for further Dollar strength. From a technical perspective, the EURUSD remains confined within the 1.16000–1.17000 range, yet retains the potential for a rebound to close the open gap and resume its climb toward 1.19500–1.20500. For this bullish scenario to hold, the pair must sustain a break above resistance at 1.17500–1.17700, which would confirm a return of upward momentum.