October brings a convergence of pivotal events on both the economic and geopolitical fronts, shaping a volatile global outlook. From looming tariff battles in Washington and monetary policy decisions in Frankfurt to military posturing in Eastern Europe and high-level political signaling in Beijing, this month may set the tone for the final stretch of 2025 and beyond.
At the same time, in a repeat of a unique and macabre political dynamic, the risk of a partial US federal government closure due to the lack spending authorization as of October 1 is very high. Both parties think they have something to gain, or less to lose from a shutdown. In addition to the disruption and hardship it directly causes, a rule of thumb is that a month-long shutdown is a 0.4%-0.5% drag on GDP. Meanwhile, talks between senior Chinese and American officials failed to deliver the pre-conditions for a summit, but President Trump and President Xi will meet on the sidelines of the APEC meeting at the end of the month in South Korea. It seems likely that the tariff truce between the two largest economies will be extended for another 90 days and into early next year.
U.S. Tariffs in the Spotlight
In the United States, attention is increasingly turning to the administration’s use of sectoral tariffs. After years of bipartisan pressure for a more protectionist stance—especially toward China and strategic industries—Washington has been weighing new tariffs. Effective October 1, the US announced 100% tariff on patented drugs (not generics), unless capacity is being built in the US (which seems to be a large exemption), a 25% tariff on heavy trucks, 50% on kitchen cabinets and vanities, and a 30% levy on upholstered furniture.
The administration's tariff plans do not appear exhausted, but as has often been the case, the effective tariffs are somewhat less than the declared rates, given the USMCA and other exemptions. New investigations have opened for robotics, industrial machinery, and medical devices.
The U.S. Supreme Court is scheduled to hear a major case in early November that could reshape how tariffs are implemented. At issue is whether the executive branch can continue to use emergency powers under the Trade Expansion Act of 1962 to impose tariffs the so-called "reciprocal tariffs."
A ruling against the administration could sharply curtail its flexibility in trade policy and recalibrate executive-congressional dynamics on economic security. Companies that are large importers, like General Motors, for example, says it has paid more than $5 bln in tariffs, and would ostensibly be reimbursed. However, a secondary market has reportedly risen for the claims on potential refunds.
Markets are not yet pricing in major changes, but trade-sensitive sectors are watching closely. A preemptive announcement—or even rhetoric—could stir volatility, especially in equities tied to industrial production and multinational supply chains. At the same time, the 15% tariffs on vehicles produced in Japan and South Korea produced may retain their competitiveness given the increase in US domestic production, given the 50% tariff on steel and aluminum.
The Fed’s October Meeting: All Eyes on Labor
The Federal Reserve’s new Summary of Economic Projections saw a median projection for cuts at both of the FOMC meetings in Q4, October 28-29 and December 9-10. However, the dispersion of views, even excluding the newest governor Stephen Miran, is stark, and the band of uncertainty around the projections seem exceptionally wide. Despite a near constant barrage of criticism from the White House and Treasury, and the attempt to fire Governor Cook, the central bank's independence from partisan politics appears to remain intact, but there is a sense the vigilance remains necessary.
It is clear that the deterioration of the US labor market triggered the Fed's reaction function. To be sure, it is not indifferent to the elevated price pressures but sees the rise in unemployment posing a greater immediate threat. In June, nine Fed officials thought there would not be a need to change rates this year. Alongside the September rate cut, at which no one dissented to stand pat, there were six (of 19) dots that did not anticipate the need for another cut this year.
Fed Chair Powell explained that both the supply of labor and the demand for labor have weakened. The unemployment rate is a good barometer of the two forces. Previously, he suggested that the economy needed to generate 150k-200k jobs a month to avoid a rise in the unemployment rate. Now, he estimates the "break-even" rate between zero and 50k jobs. The median forecast in Bloomberg' survey is for a 50k increase in jobs in September, if a government shutdown does not interfere with the release of economic data. Disturbingly, the aggregate hours worked in the private sector fell in past three months.
Europe’s Cautious Central Bank and Rising Geopolitical Risk
Across the Atlantic, the European Central Bank (ECB) also meets at the end of October, but the tone there is more restrained. Eurozone inflation has declined, and growth remains tepid, particularly in Germany and Italy. Yet the ECB has signaled that it is in no rush to cut rates further, given lingering concerns about core inflation, financial stability, and the increase in infrastructure and defense spending.
Unlike the US, where the economic debate centers on domestic demand and labor market health, Europe’s focus is increasingly geopolitical. This month saw a sharp escalation in military tensions in Poland, Romania, and Estonia. French and British fighter jets were sent to elevate the defense of NATO's eastern flank. While the incursions caused no physical damage, they rattled nerves across the continent.
This episode underscores the complex and dangerous nature of Europe’s proximity to the Russia-Ukraine war, which is now in its third year. Since arguably a little before Trump-Putin meeting in Alaska in mid-August, Moscow has deepened and broadened its attack on Ukraine. The risk of miscalculation or escalation remains real, especially with NATO forces becoming more directly involved.
China’s Political Drama and Economic Planning
In China, October marks the convening of the Fourth Plenary Session of the 20th Central Committee—a significant political event that will shape the country’s next five-year plan, covering 2026 to 2030. This session arrives at a delicate time for President Xi Jinping, who continues to consolidate power while facing growing economic headwinds and suspicions of internal challenges.
Economic growth has been uneven, weighed down by weak consumer confidence, a faltering property sector, and external trade pressures. The upcoming plan is expected to emphasize self-reliance in key sectors such as AI, energy, and semiconductors, as well as a potential recalibration of China’s “dual circulation” strategy. Despite the drop in exports to the US, China's trade surplus has grown. It has been easier for China to replace US demand, than for the US to replace the rare earth magnet, whose supply chain China dominates.
Political observers are also attuned to internal dynamics within the Chinese Communist Party. Personnel shifts at the top levels of the military and security apparatus have fueled speculation about factional infighting. More intriguingly, there is quiet but growing talk that Xi could begin to signal a potential successor—an unexpected development that could alter the trajectory of Chinese politics after more than a decade of centralized control.
A Month of Inflection
October’s overlapping risks—legal, monetary, and military—underscore how deeply intertwined economic and geopolitical narratives have become. A tariff ruling in Washington could ripple into global trade patterns. The prospect of a series of Fed cuts will likely continue to weigh on the greenback.
Yet, so far, foreign investors’ appetite or US bonds and stocks remain strong. The Treasury's monthly portfolio flow report (TIC) showed that in the first seven months, foreign investors bought about $788 bln of US financial assets. To provide some context, in the January-July 2024 period, foreign investors bought around $326 bln and in the same period in 2023, acquired almost $555.5 bln. Research by the Bank for International Settlements suggested earlier this year that investors were hedging the dollar risk, and more recent research says it is continuing.
At the same time, Russia's war on Ukraine is threatening to widen. A more direct confrontation between NATO and Russia is a real possibility. In 2015, after several warnings, Türkiye shot down a Russian fighter jet in its airspace. The incident did not escalate, but confidence that this would be the case today in eastern Europe is not high. In some circles, there is heightened concern that such a confrontation in Europe could provide a distraction for China to step up its harassment of Taiwan.
Bannockburn World Currency Index
Bannockburn's GDP-weighted currency index of currencies representing the dozen largest economies weakened for the second month this year, as all, but a few fell, against the US dollar. That euro and Australian dollar eked out a minor 0.15% gain.
BWCI has frayed the 91.00 area, which has more or less held since early August. A convincing break would lend credence to ideas that the dollar's upside correction that began with the Federal Reserve's press conference on September 17 may have a little more room to run.
U.S. Dollar: There is a strong possibility that the federal government is shut down due to the lack of spending authorization as soon as October 1. It appears that Democratic and Republican officials think they have less to lose or more to gain from temporary government closure. In addition to the disruption and embarrassment, it would interrupt the schedule of economic reports, including the September employment report on October 3. A general rule of thumb is that a shutdown shaves GDP by about 0.1% a week. The first estimate for Q3 GDP is due in late October. There is a large discrepancy between the median in Bloomberg's survey of economists (1.7% annualized) and the Atlanta Fed GDP tracker (3.7%). Concerned about the deterioration in the labor market, and accepting that the tariffs are a one-off increase in price levels (even if drawn out over several months), the Federal Reserve's updated Summary of Economic Projections showed that a median view was for two more rate cuts this year and three next year would be appropriate. Still, an important takeaway is that there is a wide dispersion of views, even excluding the newest governor. Judging from some Fed comments, the bar to another dissent in favor of a 50 bp cut at October 28-29 FOMC meeting. Meanwhile, the most likely outcome of the Trump-Xi meeting at APEC may be another 90-day extension in the "tariff truce."
Euro: The euro reached a new four-year high near $1.1920 last month before consolidating. The driver is not so much eurozone developments, or even EU developments, as it is the US side of the equation. And the broad dollar direction seems to be strongly influenced by US rates. The swaps market thinks the ECB is likely done easing policy in this cycle, while the market expects the Federal Reserve to cut by 100-125 bp by the end of next year. France's premium over Germany remains relatively wide near 80 bp for the ten-year following the recent downgrade, but there is no sense of systemic crisis and limited market impact. Similarly, Spain, Portugal, and Italy saw rating upgrades, and there was little market impact. Europe faces two important risks. The first is the escalation of the war in Ukraine and the seemingly related Russian violation of eastern European airspace. The UK and France have stepped up their protection of NATO's eastern flank. Thus far the markets have taken it in stride. The second comes from the US in the form of new sectoral tariffs, which could hit the aggregate economy that is already struggling to sustain forward momentum. After the consolidation period, we expect the euro's uptrend to resume.
(As of September 26, indicative closing prices, previous in parentheses)
Spot: $1.1705 ($1.1587) Median Bloomberg One-month forecast: $1.1770 ($1.1648) One-month forward: $1.1725 ($1.1611) One-month implied vol: 6.3% (7.7%)
Japanese Yen: Since early July, with a few notable exceptions, the dollar has traded mostly between JPY146 and around JPY150. As September winds down, the dollar was at the upper end of the range. Within that range, the exchange rate remains sensitive to the changes of US interest rates. Following the September Bank of Japan meeting that saw two dissents in favor of a hike, the first dissents under Governor Ueda’s leadership, market speculation of a rate hike this year were boosted. There is about a 55% chance of a hike in October discounted by the swaps market and almost an 80% chance of a move before the end of the year. However, after it grew by 2.2% at an annualized rate in Q2, the Japanese economy looks to have nearly stalled in Q3. Separately, the BOJ announced plans to sell JPY620 bln a year of the equity ETFs it bought under its version of Quantitative Easing. Given the stock market rally, the value of the BOJ's purchases (~JPY37 trillion) has doubled. The average daily pace of the sales looks minor (~$22 mln), which means the impact will be negligible but also that it will take over a century to divest entirely. The Liberal Democrat Party holds its leadership contest on October 4. The predictive markets show the son of former prime minister, Koizumi, is favored. There is a strong sense of continuity with the recent LDP governments. He advocates stronger wage increases and a supplemental budget to help cope with the higher inflation.
Spot: JPY149.50 (JPY147.05) Median Bloomberg One-month forecast: JPY147.60 (JPY145.00) One-month forward: JPY149.00 (JPY146.60). One-month implied vol: 8.4% (9.4%)
British Pound: Sterling reached $1.3725 in mid-September, its highest level since early July. As the dollar recovered, sterling returned to the $1.33-$1.36 range has dominated. The broad range for the past four months has been $1.32-$1.38. There was one false break out of the broad range. Since mid-April, the rolling 30-day correlation of changes in sterling and in the 10-year Gilt has been inverse, which means that higher bond yields in the UK are associated with a weaker pound. The Bank of England's base rate is 4.0%. The swaps market sees this as the top in the G10, with the effective Fed funds rate finishing the year near 3.65%. The UK economy may be expanding at a quarterly rate of 0.2% here in H2 25, but the elevated inflation appears to have tied the BOE's hands. But, in the coming year, the central bank will slow its Quantitative Tightening to GBP70 bln from GBP10 bln. Still, the combination of slow growth and sticky prices will intensify the government's challenges that will come to a head in the Autumn Budget statement late November. To be sure with the budget deficit is set to fall this year from 5.2% in 2024 to about 4.2%. The fiscal straits seem primarily due to politically inspired promises from the government.
Spot: $1.3400 ($1.3504) Median Bloomberg One-month forecast: $1.3505 ($1.3600) One-month forward: $1.3405 ($1.35) One-month implied vol: 6.3% (6.9%)
Canadian Dollar: For the better part of two months, the US dollar has traded in a CAD1.3820-CAD1.3925 range. As September winds down, the greenback is breaking higher and looks poised to challenge CAD1.40, which has not closed above since April. The Canadian dollar is sensitive to the broad direction of the US dollar. When the greenback is bid, as was the case in July, the Canadian dollar does well, and in fact, it was the strongest of the G10 currencies. September was a more difficult month for Canada. Despite the protection offered from the USMCA, the disruption of trade with the US was a significant drag on the Canadian economy, which contracted at a 1.6% annualized pace in Q2. That coupled with a weakening of the labor market spurred the Bank of Canada to extend its easing cycle, with a quarter-point cut in September, bringing the target rate to 2.50%. Indicative pricing in the derivative markets suggest that the cut was in addition to the cut that was previously envisioned. The economy may have stabilized in Q3, but real consumer spending appears to be slowing sharply. The risk is the terminal policy rate is lower than the 2.25% the market implies.
Spot: CAD1.3940 (CAD 1.3741) Median Bloomberg One-month forecast: CAD1.3825 (CAD1.3700) One-month forward: CAD1.3920 (CAD1.3725) One-month implied vol: 4.3% (4.7%)
Australian Dollar: The Australian dollar reached a new high for the year, with the last fuel provided by what seemed like a dovish FOMC statement. It reached almost $0.6710 before reversing lower. There may be potential toward the $0.6480-$0.6500 in a corrective phase. Reserve Bank Governor Bullock has tempered market enthusiasm additional rate cuts. The year-end rate implied by the futures market is near 3.35%, the highest since March. That implies another cut, which the market has discounted for the last meeting of the year in December. Strong labor and/or consumption data could give the market cause to reconsider the cut. Australia, like Canada and several European countries formally recognized Palestine. Previously, the US indicated that it would impact the US-Canada trade talks. The submarine deal under the AUKUS has seemed precarious to us during President Trump's second term, and this underscores the possibility. Over the medium-term, we look for the Australian dollar to appreciate into the $0.7000-$0.7200 area.
Spot: $0.6545 ($0.6540) Median Bloomberg One-month forecast: $0.6600 ($0.6500) One-month forward: $0.6555 ($0.6545) One-month implied vol: 8.1% (8.1%)
Mexican Peso: The attractive carry Mexico offers for dollar-based investors, coupled with the liquidity and relatively modest volatility make the peso an attractive part of carry trades. President Sheinbaum efforts to manage the relationship with the US has won high praise. Ahead of the formal re-negotiation of the USMCA treaty, Mexico is raising tariffs on countries it does not have trade agreements with, which hit China and its neighbors that are often accused to re-exporting the Mexico ("transshipment"). The USMCA protects Mexico and may still offer a cost-efficient platform to export to the US. Mexican growth is weak, and price pressures are firm. Even with the rate cut last month, bringing the overnight target rate to 7.50%, policy is still restrictive. The swaps market is pricing in a terminal rate near 7.0%, but we suspect that given the likelihood of several cuts by the Federal Reserve, Mexico's terminal rate could be closer to 6.50%. The dollar reached MXN18.20 last month, its lowest level since July 2024. Corrective pressures lifted it to almost MXN18.5650 before peso buyers re-emerged. The MXN18.18 area corresponds with a technical retracement target, and a break signals a test on the psychologically important MXN18.00 area. Below there, the next area of support around MXN17.50-60.
Spot: MXN18.3670 (MXN18.8500) Median Bloomberg One-month forecast: MXN18.6530 (MXN18.8500) One-month forward: MXN18.4280 (MXN18.7230) One-month implied vol: 8.4% (8.8%)
Chinese Yuan: The Chinese yuan slipped by less than 0.10% through most of September, for a year-to-date gain of about 3.1%. In Trump's first term, the Treasury Department briefly formally charged Beijing with currency manipulation. Current Treasury Secretary Bessent has taken a different tact. He recognized and welcomed the appreciation of the yuan, and suggested it was a bigger problem for Europe than the US. The People's Bank of China indicated no change in FX policy and that it intends to keep the yuan broadly stable. China's mainland markets are closed for the first week of October. Later in October is the Fourth Plenary Session, usually where the next five-year plan is drafted. There has been some speculation that President Xi could signal a successor. At the end of the month, Xi will meet President Trump at the APEC meeting in South Korea. That fact that there was not a formal summit suggests the two sides are far apart on key issues. That said, the US has turned down some senior Taiwanese official visits to the US rejected a $400 mln arms order by Taipei. China's anti-involution campaign appears to have yielded few results so far and will likely continue.
Spot: CNY7.1345 (CNY7.1307) Median Bloomberg One-month forecast: CNY7.1225 (CNY7.16501) One-month forward: CNY7.1055 (CNY7.0865) One-month implied vol: 4.8% (4.9%)
October 2025 Monthly
Reviewed by Marc Chandler
on
September 27, 2025
Rating:
Reviewed by Marc Chandler
on
September 27, 2025
Rating:
