USD holds gains amid tight trading ahead of key data - BBH

US Dollar (USD) consolidates within a narrow range as markets await September CPI and October PMI, while the ongoing US government shutdown adds pressure on growth and the Fed hints at year-end rate cuts, BBH FX analysts report.

US government shutdown adds downside risks to growth

"USD is building on yesterday's gains but continues to trade within a tight range in the absence of major US data releases. Indeed, FX volatility is well below its long-term average and near historic lows. We expect a bit more fireworks on Friday, with the release of the US September CPI and October PMI prints."

"The ongoing US government shutdown continues to see no resolution as both parties remain at an impasse. Senators are scheduled to meet again on October 28 for a new vote. As of today (Day 22), this is the second longest government shutdown in history. If the government remains shut down until November 5 (Day 36), it will be the longest-ever. The longer the US government shutdown lasts, the greater the downside risks to the labor market and growth."

"Fed funds futures continue to imply roughly 50bps of cuts by year-end to a target range of 3.50-3.75%, which is in line with the FOMC's median projection. We anticipate the Fed to turn more dovish by the time of the December FOMC meeting because restrictive monetary policy can worsen the already fragile employment backdrop and upside risks to inflation are not materializing. Bottom line: USD downtrend is intact."