Japan’s monetary base decreased to -6.2% year-on-year in August, down from the previous -4.1%. This data points toward a decrease in monetary resources available within the country’s economy.
The EUR/USD saw modest gains above 1.1700, as the concerns over a potential US government shutdown affect the US Dollar. Concurrently, GBP/USD maintained gains near 1.3500 due to cautious commentary from the Bank of England officials.
Precious Metals and Cryptocurrencies
Gold prices took a pause, retaining retracement from highs of $3,895 while the US Dollar dealt with a weaker stance amidst shutdown fears. Litecoin continued its price rally, surpassing $118 and had gained over 10% over the week, with technical analysis indicating potential upward movement beyond $130.
Eurozone September inflation increased to 2.2%, primarily influenced by energy impacts. European Central Bank is expected to keep rates unchanged.
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The Bank of Japan’s monetary base is shrinking faster, with the year-on-year figure now at -6.2%. This tells us the central bank is accelerating its policy normalization much more quickly than anticipated. We have not seen this kind of aggressive quantitative tightening since the BOJ first began reversing its massive stimulus policies of the previous decade.
Impact of US Government Shutdown
Our main focus, however, should be the US government shutdown, which is directly causing US Dollar weakness. This political instability, coupled with the halt in key data releases like jobless claims, creates significant uncertainty for traders. Looking back at the shutdown in late 2023, the dollar index (DXY) experienced a notable drop as fiscal gridlock paralyzed Washington.
We are seeing this play out in currency pairs, with the EUR/USD pushing above 1.1700. Even with the European Central Bank expected to remain on hold, the dollar’s weakness is the overriding market force. This makes strategies that favor a stronger euro or British pound against the dollar, such as buying call options, appear attractive.
This uncertainty is also fueling the rally in gold, which is now approaching $4,000 an ounce. As a classic safe-haven asset, gold benefits directly when confidence in the US government and its currency falters. We have seen open interest in gold futures contracts on the CME surge over 15% in the last month, confirming strong institutional buying.
For our purposes, the combination of a tightening BOJ and a weak dollar sends a clear signal for the USD/JPY pair. We should anticipate continued downward pressure as the yen strengthens fundamentally while the dollar weakens from political turmoil. Therefore, positioning through put options on USD/JPY or selling futures could be a primary strategy over the coming weeks.
