As we enter the final stretch of 2025, global markets are grappling with a mix of monetary policy uncertainty, softening U.S. labour data, and political instability stemming from the ongoing government shutdown. According to BCA Research, these factors are converging to create tactical opportunities in currency and bond markets, particularly around the U.S. dollar and long-duration strategies in the fixed income space.

Fed Mispricing Could Trigger a Dollar Bounce

BCA Research argues that markets are currently too dovish on the Federal Reserve’s policy path for the remainder of the year. Traders are pricing in roughly 50 basis points of additional rate cuts, which is more than what the Fed’s own projections suggest. This misalignment opens the door for a hawkish surprise, and BCA sees scope for a tactical rally in the U.S. dollar, with the DXY potentially climbing to the 100–102 range before year-end.

As illustrated in Figure 1, market pricing diverges from the Fed’s dot plot, reinforcing the potential for a repricing event. The technical setup also supports this view. Figure 2 shows the DXY’s failed breakdown and emerging positive momentum divergence, suggesting scope for a bounce. Sentiment and positioning remain negative, which further supports the potential for near-term strength.

Figure 1

Figure 2

However, BCA cautions that this move is tactical, not structural. Longer-term headwinds—particularly rising unemployment risks in 2026—are likely to cap the dollar’s upside beyond this cycle. The Fed’s own unemployment forecasts for next year appear overly optimistic, which could necessitate deeper cuts further out.

Labour Market Weakness Beneath the Surface

The U.S. government shutdown has disrupted the release of key economic indicators, including the monthly non-farm payrolls report and weekly initial jobless claims. In the absence of official data, BCA Research turned to alternative sources, which collectively point to a marginally weaker labour market in September.

The Challenger report showed hiring remained extremely slow, while layoffs did not spike—extending the “low hiring, low firing” trend. The Chicago Fed’s real-time model estimated a slight rise in unemployment to 4.34% from 4.32% in August. Meanwhile, the ADP report revealed a 32,000 job contraction, accompanied by significant downward revisions to prior months. Regional Fed manufacturing surveys indicated mild employment declines across districts, and consumer sentiment surveys suggest jobs are becoming harder to find. BCA highlights that labour demand appears to be falling faster than supply, exacerbated by immigration restrictions.

Additional data from the August JOLTS report showed further loosening in cyclical industries, while Indeed job postings declined in September. Despite these signs of softening, markets continue to assume that Fed easing will contain downside risks. However, BCA warns that deeply negative labour data could weigh on corporate earnings, while a resurgence in inflation remains an underpriced risk.

From a currency perspective, the U.S. dollar is tactically positioned for some near-term strength. The current mispricing of Fed rate expectations, where markets are pricing in more easing than the Fed itself projects, combined with supportive technical signals, suggests the greenback could rally before year-end. This outlook is reinforced by the view that neither a sharp deterioration in earnings nor a resurgence in inflation is the base case, allowing room for the dollar to strengthen before longer-term headwinds, such as rising unemployment in 2026, begin to weigh.

Shutdown Uncertainty: A Political Wildcard

The ongoing U.S. government shutdown adds another layer of complexity to the macro outlook. According to BCA, there is a 50% probability that the shutdown could extend beyond three weeks. While the immediate economic impact has been limited, investors remain concerned about the potential for prolonged disruption and its implications for federal employment, fiscal policy, and market sentiment.

BCA outlines two plausible paths toward resolution. First, a continuing resolution that extends government funding through 21 November has already gained partial bipartisan support, with three Democrats voting alongside Republicans. As of the time of writing, only five more votes are needed to pass the measure. Second, a one-year extension of enhanced Obamacare subsidies could serve as a compromise, benefiting both parties ahead of the midterm elections.

However, risks remain. President Trump’s approval rating among Republicans remains high at 93%, and many within the party support a leaner federal government. Meanwhile, Democrats are unlikely to back down on healthcare-related issues, which remain politically popular. BCA notes that a retreat is only likely if Republicans signal a willingness to compromise, such as by supporting the subsidy extension.

This political uncertainty has delayed key data releases and complicated the Fed’s policy outlook. Markets are now watching closely to see whether the September jobs report will be released. If withheld, it could increase volatility across risk assets and challenge the Fed’s ability to justify further easing. BCA expects that if labour data confirms a cooling trend, the USD may soften, providing support for high-beta currencies like the rand.

Conclusion: Tactical Positioning Amid Uncertainty

As Q4 unfolds, BCA Research’s insights suggest a cautious but opportunistic approach to global markets. Mispricing in Fed expectations, softening labour data, and political gridlock are creating tactical opportunities in FX and fixed income. While the U.S. dollar may rally in the near term, structural headwinds remain.

Importantly, the USD’s rebound is not expected to be sustained indefinitely. BCA emphasises that the current environment, marked by overly dovish market pricing and low thresholds for positive data surprises, favours a tactical bounce in the greenback. However, as unemployment risks build into 2026 and the Fed potentially shifts toward deeper easing, the dollar’s longer-term trajectory remains capped in terms of fundamentals.

With the rand vulnerable to global risk sentiment and commodity price swings, monitoring the interplay between Fed policy, U.S. data releases, and political developments will be key to navigating the final quarter of the year.

For deeper insights and tailored solutions, contact David du Plessis at dduplessis@wauko.com or Evan May at emay@wauko.com.