Last Friday, US President Trump’s tariff threats on China led to notable movements in the FX and bond markets. The USD/CNH saw a sharp rise, while the DXY dollar index fell, suggesting a greater economic impact on the US compared to China. Chinese export data showed successful diversification away from the US market. US short-dated Treasury yields dipped 5-8 basis points, indicating a macroeconomic threat to the US rather than a simple ‘Sell America’ narrative.

US equity futures recovered about half of the losses from Friday due to reassuring statements from Washington. A potential 100% tariff increase on China is planned for 1 November, after a meeting between Presidents Trump and Xi. Markets are anticipating further developments before this date. The ongoing US government shutdown and lack of domestic data remain unresolved.

Current Economic Outlook

The probability of the government shutdown continuing into November stands at 67%. Central bankers’ communications, especially during the IMF meetings, are in focus. The IMF’s Financial Stability Report is expected to address stock market valuations. The Fed’s Beige Book release on Wednesday will be key in assessing any labour market slowdown. The DXY index might fluctuate with US-China news, with a potential short-term top near 99.50 and a possible drop to the 98.00 region.

Recent shifts in US-China negotiations are creating decisive market action that we must watch closely. The fallout from geopolitical tensions seems to impact US markets more directly now, a pattern we also observed back in the late 2010s during the trade wars. Data from Q3 2025 confirms China has continued to successfully diversify its export base towards ASEAN nations, making it more resilient to direct US pressure.

This means traders should expect volatility in currency pairs and indices to be driven by headlines in the coming weeks. High-level talks are expected, and any perceived shift in tone from Washington or Beijing will likely cause sharp, short-term moves in the DXY and equity futures. We are also monitoring stalled budget negotiations in Washington, which are adding another layer of uncertainty to domestic US policy.

Monetary Policy and Market Reactions

The focus will also be on central bank communication, especially with the autumn IMF meetings underway. We will be listening to Fed Chair Powell tomorrow and the ECB’s Christine Lagarde on Thursday for signals on how they are balancing growth fears against the memory of the high inflation from a few years ago. The IMF’s Financial Stability Report, also out tomorrow, will likely highlight concerns over high equity valuations, as the S&P 500’s current cyclically-adjusted price-to-earnings (CAPE) ratio sits near 35, well above its long-term average of 17.

This week’s release of the Fed’s Beige Book on Wednesday will be scrutinized for signs of a slowdown, particularly in the labor and manufacturing sectors. Given the Columbus Day holiday today, we expect thin trading, but volatility could pick up tomorrow. Expect the DXY to be sensitive to US-China headlines, but a break below the 104.50 support level could be triggered if Powell’s speech or the Beige Book confirm weakening economic activity.

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