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EUR/USD remains steady during the North American session on Thursday, yet registering back-to-back bearish days as the US Dollar strengthens amid the ongoing government shutdown and the absence of US economic data releases like Initial Jobless Claims. The pair trades at 1.1719, down 0.09%.
Wall Street is poised to end the day in the green despite the lack of progress to reopen the US government. Data from Challenger, Gray and Christmas revealed that companies are expected to hire over 30,000 fewer people in September, as the labor market continues to cool down.
Dallas Federal Reserve (Fed) President Lorie Logan was hawkish, stating that inflation is above target and trending upward. Despite this, she recognized the risks on both sides of the dual mandate, adding that the labor market is cooling.
Given the backdrop, investors seem confident that the Fed will slash rates at the October 29 meeting, with odds standing at 96%, as revealed by the Prime Market Terminal interest rate probability tool.
In the meantime, the US Nonfarm Payrolls report is expected to be delayed, leaving traders adrift for the Institute of Supply Management (ISM) Services PMI for September and Fed officials crossing the wires.
Across the pond, Eurostat revealed that the Unemployment Rate rose from 6.2% in July to 6.3% in August, above estimates.
EUR/USD has remained steady above the 1.1700 figure during the last four trading days, yet it has failed to clear 1.1750, which could open the door for further gains. The Relative Strength Index (RSI) shows signs of being flattish near the 50 neutral level.
If EUR/USD clears 1.1740, the next resistance would be 1.1800, ahead of the yearly high of 1.1918. Conversely, a drop below 1.1700 would expose 1.1650, before challenging the 100-day SMA at 1.1610.
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region.
The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa.
The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro.
QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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The economic consequences of the current federal government shutdown hinge critically on how long it lasts. If it is resolved quickly, the costs will be small, but if it drags on, it could send the U.S. economy into a tailspin.
That’s because the economy is already in a precarious state, with the labor market struggling, consumers losing confidence and uncertainty mounting.
As an economist who studies public finance, I closely follow how government policies affect the economy. Let me explain how a prolonged shutdown could affect the economy – and why it could be a tipping point to recession.
The partial government shutdown began on Oct. 1, 2025, as Democrats and Republicans failed to reach a deal on funding some portion of the federal government. A partial shutdown means that some funding bills have been approved, entitlement spending continues since it does not rely on annual appropriations, and some workers are deemed necessary and stay on the job unpaid.
While most of the 20 shutdowns that occurred from 1976 through 2024 lasted only a few days to a week, there are signs the current one may not be resolved so quickly. The economy would definitely take a direct hit to gross domestic product from a lengthy shutdown, but it’s the indirect impacts that could be more harmful.
The most recent shutdown, which extended over the 2018-2019 winter holidays and lasted 35 days, was the longest in U.S. history. After it ended, the Congressional Budget Office estimated the partial shutdown delayed approximately US$18 billion in federal discretionary spending, which translated into an $11 billion reduction in real GDP.
Most of that lost output was made up later once the shutdown ended, the CBO noted. It estimated that the permanent losses were about $3 billion – a drop in the bucket for the $30 trillion U.S. economy.
The full impact may depend to a large extent on the psychology of the average consumer.
Recent data suggests that consumer confidence is falling as the stagnation in the labor market becomes more clear. Business confidence has been mixed as the manufacturing index continues to indicate the sector is in contraction, while other business confidence measures indicate mixed expectations about the future.
If the shutdown drags on, the psychological effects may lead to a larger loss of confidence among consumers and businesses. Given that consumer spending accounts for 70% of economic activity, a fall in consumer confidence could signal a turning point in the economy.
These indirect effects are in addition to the direct impact of lost income for federal workers and those that operate on federal contracts, which leads to reductions in consumption and production.
The risk of significant government layoffs, beyond the usual furloughs, could deepen the economic damage. Extensive layoffs would shift the losses from a temporary delay to a more permanent loss of income and human capital, reducing aggregate demand and potentially increasing unemployment spillovers into the private sector.
In short, while shutdowns that end quickly tend to inflict modest, mostly recoverable losses, a protracted shutdown – especially one involving layoffs of a significant number of government workers – could inflict larger, lasting impacts on the economy.
This is all occurring as the U.S. labor market is flashing warnings.
Payrolls grew by only 22,000 in August, with July and June estimates revised down by 21,000. This follows payroll growth of only 73,000 in July, with May and June estimates revised down by 258,000.
In addition, preliminary annual revisions to the employment data show the economy gained 911,000 fewer jobs in the previous year than had been reported.
Long-term unemployment is also rising, with 1.8 million people out of work for more than 27 weeks – nearly a quarter of the total number of unemployed individuals.
At the same time, AI adoption and cost-cutting could further reduce labor demand, while an aging workforce and lower immigration shrink labor supply. Fed Chair Jerome Powell refers to this as a “curious kind of balance” in the labor market.
In other words, the job market appears to have come to a screeching halt, making it difficult for recent graduates to find work. Recent graduate unemployment – that is, those who are 22 to 27 years old – is now 5.3% relative to the total unemployment rate of 4.3%.
The latest data from the ADP employment report, which measures only private company data, shows that the economy lost 32,000 jobs in September. That’s the biggest decline in 2½ years. While that’s worrying, economists like me usually wait for the official Bureau of Labor Statistics numbers to come out to confirm the accuracy of the payroll processing firm’s report.
The government data that was supposed to come out on Oct. 3 might have offered a possible counterpoint to the bad ADP news, but due to the shutdown BLS will not be releasing the report.
This will only increase the uncertainty surrounding the health of the U.S. economy. And it adds to the uncertainty created by on-again, off-again tariffs as well as the newly imposed tariffs on lumber, furniture and other goods.
Against this backdrop, the Fed is expected to lower interest rates at least two more times this year to stimulate consumer and business spending following its September quarter-point cut. This raises the risk of reigniting inflation, but the cooling labor market is a more immediate concern for the Fed.
While lower short-term rates may help at the margin, I believe they cannot resolve the deeper challenges, such as massive government deficits and debt, tight household budgets, a housing affordability crisis and a shrinking labor force.
The question now is not will the Fed cut rates, because it likely will, but whether that cut will help, particularly if the shutdown lasts weeks or more. Monetary policy alone cannot overcome the uncertainty created by tariffs, the lack of fiscal restraint, companies focused on cutting costs by replacing people with technology, the impact of the shutdown and the fears of consumers about the future.
Lower interest rates may buy time, but they won’t solve these structural problems facing the U.S. economy.