A shutdown of the US federal government is becoming practically unavoidable as Congress is unable to reach a budget agreement. In the coming hours, a halt in federal operations may destabilize the economy, delay the release of key macroeconomic data, and increase volatility in financial markets. We analyze the causes of the standoff, potential crisis scenarios, and possible consequences for the dollar, markets, and the US economy as a whole.
Latest news: talks deadlocked and political tensions rise
In the final day before a potential shutdown, the situation in Washington has taken on all the signs of a major crisis. Negotiations between President Donald Trump and congressional leaders have once again failed to yield even minimal progress.
With less than 24 hours before federal funding expires, the parties remain fundamentally divided, making a last-minute compromise almost impossible.
The main point of contention is the temporary funding bill, which Republicans are promoting in the House of Representatives. To pass the Senate, it would require the support of at least eight Democrats.
Democratic Party representatives have stated openly that they are not willing to support the bill without the inclusion of key social provisions: the extension of ACA (Obamacare) healthcare subsidies, the reversal of new Medicaid cuts, and additional safeguards against unilateral budget moves by the administration.
President Trump, in turn, is taking a hard line, openly blaming the Democrats for blocking the funding and threatening mass federal employee layoffs if the government shuts down. Leaders of both parties do not rule out that a shutdown could drag on for weeks unless strategies change.
The standoff is further complicated by intraparty disagreements: even with a formal majority in the Senate, Republicans need the support of several Democratic senators, while some members of their own party are also voting against the temporary budget. Attempts to reach a compromise—including the gradual reduction of certain medical subsidies—have not yet yielded results.
On the eve of the deadline, lawmakers acknowledged the negotiation process has stalled, and the chances of avoiding a shutdown are minimal. Against this backdrop, markets are reflecting heightened uncertainty: investors are cautious, anticipating the possible consequences of a paralysis of federal institutions and delays in the publication of crucial economic indicators.
How shutdown works: mechanism, laws, and historical context
The mechanism of "shutdown"—the temporary cessation of the US federal government's operations—is embedded in the country's budgetary process.
Every fiscal year, Congress is required to approve 12 appropriations bills that regulate government agency spending. If by October 1, the start of the new fiscal year, either a full package or a temporary budget solution (Continuing Resolution, CR) has not been adopted, federal agencies lose the legal right to spend funds, and the government shutdown procedure is triggered.
A shutdown does not affect all government functions equally. Federal services are classified as either "essential" or "non-essential." For example, personnel from the Department of Defense, air traffic control, public safety, and law enforcement agencies continue to work without pay—their functions are deemed critically important for the country's safety and operation.
However, a significant portion of civil servants and agencies, including support services such as national parks, museums, and certain analytical and statistical agencies, are placed on unpaid leave.
The legal foundation for this structure originates from the Antideficiency Act, enacted in the late 19th century and tightened in the 1980s. The law prohibits spending funds not approved by Congress, and violations can result in criminal liability.
Since 1981, there have been 14 government shutdowns in the United States, ranging in duration from one day to a record 35 days in the winter of 2018–2019. The causes have included acute budget disputes and conflicts over social policy, healthcare, immigration, and federal funding priorities. In modern history, the division of Congress between parties, along with the rise of radical factions within both parties, has made "budgetary blackmail" a habitual part of the political cycle.
It is important to distinguish a shutdown from a default on government bonds: even with a complete government halt, the US does not stop servicing its sovereign debt. However, systemic disruptions in government operations undermine confidence in the national economy and create turbulence in financial markets from the moment they occur.
What all this means for USD and markets?
The key consequences of a shutdown for US financial markets depend on the duration of the crisis and how quickly a negotiated compromise can be reached. But even a short-term stoppage of government operations already pressures investor sentiment and the dynamics of American assets.
First, a shutdown means a freeze in the publication of key macroeconomic statistics, including data on the labor market, inflation, and economic activity—these reports are vital for Federal Reserve decision-making, and their absence increases uncertainty and reduces visibility for financial markets.
Second, investors, who traditionally view the dollar as a safe-haven asset, may begin to question its reliability in the face of recurring budget crises. Amid political deadlock, the dollar comes under short-term pressure: the US dollar index, already down nearly 10% since the start of the year, fell another 0.2% on Monday after a brief rise the previous week.
Volatility in the markets has increased: yesterday, during the trading day, the dollar lost 0.6% against the yen, dropping to 148.61, while the euro strengthened by 0.3% to $1.1731.
Expectations of further Fed policy easing continue to weigh on the greenback—traders are already pricing in a rate cut of 42 basis points by December and more than 100 points by the end of 2026.
Third, for the stock market, a shutdown means increased volatility and a sell-off in risk assets. Stagnation of government spending, the temporary furlough of hundreds of thousands of federal employees, and delays in government procurement result in slower economic activity. Companies dependent on government contracts, as well as private contractors and suppliers to federal agencies, face the threat of losing income.
As analysts note, a short-term shutdown is unlikely to trigger a large-scale market correction; however, the longer the pause in government operations lasts, the greater the economic and market costs. Against this backdrop, investors will be closely monitoring both the duration of the standoff and Congress's efforts to return the federal apparatus to normal functioning.
Recommendations for traders: strategies during shutdown
Amid the current budget standoff and the high probability of a shutdown, analysts agree that investors and traders should exercise maximum caution and be prepared for increased market volatility, especially if the government closure is prolonged.
Elias Haddad notes that if the shutdown is short-lived, the Federal Reserve is likely to ignore it. However, he emphasizes that a prolonged shutdown heightens the risk of slower economic growth and makes the Fed more inclined toward policy easing.
In practice, this could mean a further decline in US Treasury yields, increased attractiveness of safe-haven assets, and a weakening of the dollar against major world currencies.
Trading recommendations:
For currency traders: In the short term, the dollar remains under pressure due to political uncertainty and the risk of delays in the publication of key macroeconomic data. In the composition of the dollar index, the euro and yen may temporarily strengthen, especially if the shutdown complicates the Fed's work and slows the economic recovery. However, a sharp dollar devaluation is unlikely—long-term fundamental factors remain intact.
For stock market participants: Elevated volatility is expected in the US domestic market, especially in shares of companies dependent on government contracts or linked to budget programs (contractors, suppliers, IT, and infrastructure sectors). Risks are higher for medium and small businesses focused on government funding. Consider diversifying your portfolio and increasing your share of cash assets until there is greater clarity on a compromise in Congress.
For bond investors: Short-term US Treasury bills will come under some pressure, while demand may rise for long-term safe-haven assets such as gold, the Swiss franc, the yen, and German government bonds. Once the situation stabilizes, a moderate recovery in the Treasury market can be expected.
Tony Sycamore, a market analyst, points out that historically the economic damage from a shutdown is often offset after it ends, and a serious revaluation of American assets is only possible in the event of a prolonged budget deadlock: "The impact on GDP has been minimal, as any disruptions are usually remedied immediately after the shutdown concludes." However, in an environment of high inflation and uncertainty, the Fed no longer has the previous buffer to simply ignore temporary shocks.
So, the key strategies for traders are:
- Significantly reduce leverage and position limits in trading operations.
- Temporarily refrain from making large directional bets on the dollar and US stock indices until the situation becomes clearer.
- Closely monitor news from Congress, announcements of temporary resolutions, and current macroeconomic data—lack of information will complicate fundamental analysis and increase the market's sensitivity to emotional factors.
Ultimately, a shutdown once again serves as a stress test for the entire system: the market has already priced in some of the risk, but the scale of the fallout will be determined by the duration of the budget crisis. In such an environment, heightened caution and the adaptability of trading strategies become key competitive advantages.
