US Faces Partial Shutdown

The inability of US lawmakers to reach a common platform for raising the government’s spending limit before the midnight deadline has resulted in a partial shutdown of many of its essential operations. Although the damage has already been done, how soon these lawmakers agree to a solution will determine the extent of the damage. Meanwhile, manufacturing and employment data in key European economies have been downbeat this morning, thereby shifting market focus to the Euro zone unemployment data later today. At home, an unexpected marginal decline in manufacturing PMI has raised eyebrows over Mark Carney’s view of adding no further stimulus into the economy. Today’s US manufacturing data will be eyed to ascertain the pace of recovery in global manufacturing activity.

Pound Sterling – UK Markets

The Pound was searching for direction against the greenback for most of yesterday before moving higher later in the day, as talks of a partial US government shutdown gained ground. At home, adding to signs of a strong recovery in the housing market and the formation of a potential housing bubble, data released yesterday showed that mortgage approvals for August rose to the highest level since February 2008. Meanwhile, the UK Chancellor, George Osborne unveiled strict guidelines for people claiming jobless benefits where the unemployed will have to undertake work placements in return for benefits. Meanwhile, Sterling is trading on a stronger footing against the US Dollar this morning, breaching the 1.62 mark against the greenback for the first time in nearly nine months after the US government began its partial shutdown following lawmakers’ failure to reach an agreement to fund the government. Meanwhile, data just out has revealed an unexpected marginal drop in the UK manufacturing activity for September. Today’s weak print has turned market attention to tomorrow’s construction PMI for further cues.

US Dollar – US Markets

Lawmakers in the US failed to agree on a suitable formula to keep the government fully functional, thereby resulting in a partial shutdown for the first time since 1996. As a result, thousands of government workers would be furloughed, national parks would be closed and the government’s handling of certain applications and cases would cease. The US Dollar is feeling the heat and has weakened against its major peers this morning, as investors remained worried about the potential impact on the economy due to the fiscal battle unfolding in Washington. However, negotiations will continue later today and lawmakers are expected to come to a compromise soon. Amid the prevalent gloom on the fiscal front in the US, yesterday’s upbeat Chicago and Dallas manufacturing indices momentarily cheered market participants. Investors are hoping for a similar show from the ISM manufacturing report later today. Any negative surprises on this front will further dampen demand for the US Dollar. Moreover, news flows emanating the US political arena will keep traders interested in the near term.

Euro – European Markets

The common currency traded mostly higher against the US Dollar yesterday, as the world’s largest economy moved closer to a partial shutdown, underpinning demand for the Euro. Meanwhile, uncertainty persists in Italy ahead of tomorrow’s confidence vote to determine the fate of the five-month old government. Even though Silvio Berlusconi has reportedly offered to provide partial support to the government to pass the 2014 budget and tax reforms in lieu of November 2013 elections, it is still unclear whether or not the Prime Minister, Enrico Letta, will accept the proposal. In today’s trading session, the Euro has moved higher against the greenback, as the US succumbed to the political wrangling over raising the government’s spending limit. However, the upside in the Euro remains capped following weak German jobs report and mostly downbeat manufacturing data across Europe. Considering today’s weak economic data and the Euro zone consumer price inflation easing to the lowest level in more than three years yesterday, market speculation of the ECB pumping in more money to support the economy at its policy meeting tomorrow has gained ground. Later today, the Euro zone unemployment data will be eyed for further direction to the Euro.

Other Currencies – Highlights

The Australian Dollar has arrested its recent downward movement and is trading on a stronger footing against the majors this morning after the Reserve Bank of Australia held its benchmark interest rate steady at its policy meeting earlier today. Additionally, Australia’s manufacturing sector expanded for the first time in more than two years, lending further support to the Australian Dollar. Furthermore, with home sales and retail sales data coming in positive this morning, traders expect the window of opportunity for an interest rate cut to close, in line with the central bank’s assessment. The “risk on” sentiment has also remained supported after US lawmakers failed to arrive at a solution on raising the spending limit. With no major domestic economic releases for the day, news flows emanating from both sides of the Atlantic, especially the latest update on US budget woes, will prove crucial for risk appetite. Furthermore, tomorrow’s domestic trade balance and building approvals data will be keenly eyed for further direction to the Australian Dollar.