In the United States, mortgage applications rose by 8% in early October, recovering from a previous drop of 12.7%. In currency markets, GBP/JPY climbed to 205.00 as hopes for a rate hike from the Bank of Japan dimmed. The USD/CHF pair strengthened due to a robust US Dollar amid concerns over a government shutdown and speculation about a potential rate cut by the Swiss National Bank.

Gold Prices Driven by Safe Haven Demand

Gold prices stayed steady above $4,000, bolstered by safe-haven demand stemming from fears about the US government shutdown and possible Federal Reserve rate cuts. Minutes from the Federal Reserve’s meeting are expected to shed light on upcoming rate cuts during the ongoing government shutdown. EUR/USD struggled around the 1.1600 mark, impacted by political instability in France and a strong US Dollar. At the same time, GBP/USD fell below 1.3400 due to continued interest in the US Dollar. In the cryptocurrency market, Solana held above $220, but a drop in on-chain activity might slow its ascent toward the $250 mark. The broader cryptocurrency market is showing signs of recovery after a previous downturn.

Impacts of Ongoing Government Shutdown

The current government shutdown is causing significant uncertainty, which presents a chance to trade on market volatility. Past events, like the long shutdown late in 2018, led to a sharp rise in the VIX index, which surged over 80% in a few weeks. We think buying volatility through options on major indices could be a smart approach in the coming weeks. With the shutdown delaying key jobs data, predicting the Federal Reserve’s moves on interest rate cuts has grown more challenging. Currently, the Secured Overnight Financing Rate (SOFR) futures market reflects a volatile 60% chance of a rate cut by December, a drop from the 85% probability seen last month. This uncertainty makes options on interest rate futures an appealing way to prepare for the Fed’s decisions. The rise in mortgage applications from -12.7% to -4.7% indicates that the housing market may be stabilizing after the steep decline of 2024. This information could reduce expectations for how many rate cuts the Fed might consider this cycle, suggesting we may have passed the worst of the housing slowdown. The US Dollar continues to perform strongly, benefiting from France’s political instability and its role as a safe haven during the shutdown. The gap between French and German 10-year government bond yields has widened by 15 basis points in the past week, highlighting investor concerns in Europe. We expect further pressure on the EUR/USD pair, making short-term put options a potentially useful hedge. Gold is acting as a traditional safe haven, surpassing $4,000 an ounce. This price movement reflects a pattern similar to the 2011 US debt ceiling crisis when gold prices rose over 15% in just one month due to fiscal concerns. Given the current high price, using call option spreads can enable traders to benefit from further gains while limiting initial costs. While riskier assets like Solana are trying to recover, the decline in on-chain activity serves as a warning. This suggests that the recent price increases lack strong support and are more speculative than driven by solid demand. We see this as a sign that overall market confidence has not yet fully returned. Create your live VT Markets account and start trading now.

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