Last Friday, President Trump’s threats to impose tariffs on China caused significant shifts in the foreign exchange (FX) and bond markets. The USD/CNH experienced a sharp increase, while the DXY dollar index dropped. This indicates that the economic impact on the US may be greater than on China. Meanwhile, data revealed that China has successfully diversified its exports away from the US. US short-term Treasury yields fell by 5-8 basis points, signaling a broader economic threat to the US rather than just a ‘Sell America’ scenario. US equity futures bounced back, recovering about half of their losses from Friday due to encouraging remarks from Washington. A potential 100% tariff increase on China is set for November 1, following a meeting between Presidents Trump and Xi. Markets are on alert for further updates leading up to this date. The ongoing US government shutdown and the absence of new domestic data are still unresolved.

Current Economic Outlook

There is a 67% chance that the government shutdown will extend into November. Central bankers’ discussions, particularly during the IMF meetings, are being closely watched. The IMF’s Financial Stability Report is expected to address stock market valuations. The Fed’s Beige Book, set to be released on Wednesday, will be critical for understanding any slowdown in the labor market. The DXY index may vary with US-China developments, possibly reaching a short-term high near 99.50 or dropping to around 98.00. Recent changes in US-China negotiations are leading to significant market movements, and we should keep a close eye on these events. The fallout from geopolitical tensions seems to be affecting US markets directly. This pattern resembles what happened during the trade wars in the late 2010s. Q3 2025 data shows that China has continued to diversify its exports towards ASEAN nations, which helps it withstand US pressures. Traders should prepare for volatility in currency pairs and indices driven by news in the coming weeks. High-level discussions are expected, and any noticeable change in tone from Washington or Beijing could prompt quick moves in the DXY and equity futures. We are also monitoring stalled budget talks in Washington, adding further uncertainty to US domestic policy.

Monetary Policy and Market Reactions

Attention will be on central bank communications, especially with the autumn IMF meetings happening now. We will listen to Fed Chair Powell tomorrow and ECB President Christine Lagarde on Thursday for insights on how they are balancing concerns about economic growth with memories of past high inflation. The IMF’s Financial Stability Report, also releasing tomorrow, is likely to express worries about high equity valuations, since the S&P 500’s cyclically-adjusted price-to-earnings (CAPE) ratio is currently near 35, significantly above the long-term average of 17. The Fed’s Beige Book, set for release on Wednesday, will be examined for signs of a slowdown, particularly in labor and manufacturing. As today is Columbus Day, we anticipate less trading activity, but volatility may increase tomorrow. The DXY will likely respond to US-China headlines, and a drop below the 104.50 support level could occur if Powell’s speech or the Beige Book suggests weakening economic performance. Create your live VT Markets account and start trading now.

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