If you felt like you had whiplash watching the markets this week, you weren’t alone. The US Dollar, in particular, went on a wild rollercoaster ride.
So, what happened?
The simple reason: the US government shutdown.
Because the government has been shut for a record-long time, there is no official economic data. We didn’t get the big, official monthly jobs report.
This means traders are “flying blind.” They are desperate for any piece of news and are overreacting to private reports that are normally considered second-tier.
The Two-Day Whipsaw
Here’s what that “flying blind” looked like in practice:
- On Wednesday: A private jobs report (ADP) came in a little better than expected. Markets immediately thought, “The economy is fine! The US Fed doesn’t need to cut interest rates!” This made the US Dollar rally.
- On Thursday: Another private report (Challenger) showed the highest number of company layoffs for an October since 2003. The market panicked and completely reversed. The new thinking was, “The economy is in trouble! The Fed will have to cut rates after all!” This made the US Dollar fall hard.
This is a classic “whipsaw” market, where prices swing violently in both directions.
What Happened with Other Currencies?
British Pound (GBP/USD)
The other big story was the Bank of England. They voted to hold interest rates, but it was a super-close 5-4 vote. Four of the nine members wanted to cut rates right now.
This is what we call a “dovish hold”—it signals to the market that they are very close to cutting rates, possibly as soon as December.
You might have seen the Pound (GBP/USD) rally, but this was mostly a “buy the fact” move that was super-charged by the US Dollar collapsing at the same time.
Euro (EUR/USD)
The Euro was just along for the ride. It didn’t have much of its own news, so it simply did the opposite of the US Dollar. When the dollar fell on Thursday, the Euro went up.
Japanese Yen (USD/JPY)
The USD/JPY pair is trapped. A strong dollar is good for the pair. But when scary news (like the layoff report) hits the market, investors often buy the Japanese Yen as a “safe-haven,” which pulls the pair back down.
What to Be Cautious About as the Week Wraps
As we head into the weekend, the market is deceptively quiet. Be careful. - The Problem Isn’t Solved: The government is still shut down. We are still “flying blind,” so this volatility could easily continue.
- Headline Risk: With no real data, any news headline about the shutdown or politics can cause a big, sudden market swing.
- Be Wary of Friday Trading: After such a wild week, many traders will be closing their positions to take profits. Low trading volume on a Friday afternoon can lead to sharp, unexpected price spikes.
