US Shutdown Enters Second Week

There seems to be no end to the US budget impasse even as the partial government shutdown enters into the second week, pushing the nation closer to a default. With the House Speaker, John Boehner, also expressing concerns that an increase in the debt ceiling without any additional provisions seems improbable, the simmering brinksmanship among policymakers could potentially derail the nascent economic recovery in the US. On the domestic front, the BoE meeting later this week is expected to be a low key affair, with little expectations of a change in policy stance. Meanwhile, this week’s slew of important economic releases across the Euro zone will help investors in ascertaining the strength of recovery in the single currency bloc.

Pound Sterling – UK Markets

After climbing to a nine-month high against the greenback early last week, Sterling dropped close to the 1.60 mark on Friday, as traders booked profits amid a lack of domestic triggers. Furthermore, in the aftermath of last week’s slightly weaker PMI prints, a hike in benchmark interest rates looks unlikely in the near term, further weighing on the performance of the Pound against the majors. The BoE is expected to hold policy rates steady until growth firms up further and the unemployment rate declines to 7%. Meanwhile, the Pound is trading firmer against the US Dollar this morning, as the continued deadlock in Washington has heightened risk of the US government possibly defaulting on its payment obligations. With no major economic releases scheduled for today, trading in the Pound will be influenced by developments taking place across the Atlantic. Market participants will also eye BRC retail sales and RICS house prices data due overnight for further direction. Additionally, the BoE meeting, factory output and trade balance data later this week have the potential to sway market sentiment.

US Dollar – US Markets

On Friday, the greenback moved higher against the majors, as traders built positions in the attractively priced greenback amid a lack of economic triggers. However, investors remained watchful, as they continued to weigh the dire consequence of a prolonged US shutdown, now entering into its second week. Meanwhile, Jack Lew, the US Treasury Secretary, warned that the US government will risk defaulting on its debt for the first time in its history, if the spending limit is not raised at the earliest. The US Dollar is trading weaker against the majors in today’s trading session after Christine Lagarde, the head of the IMF, warned over the weekend that if lawmakers failed to raise the US debt ceiling, US growth will dip below 2% this year and hurt the global economy. With a light domestic economic calendar today, traders are looking ahead to the FOMC minutes and retail sales data later this week. However, developments in the budget deadlock will be keenly eyed for further direction to risk appetite. Any further delay in raising the spending limit will make market participants jittery and could further weigh on the performance of the greenback.

Euro – European Markets

Despite US lawmakers being embroiled in a bitter fight over raising the government’s spending limit, the single currency nudged lower against the US Dollar on Friday. However, downside in the Euro remained capped amid speculation of a US debt default, if lawmakers are unable to arrive at an agreeable solution before the mid-October deadline when the US is expected to exhaust its current borrowing limit. The just released Sentix investors’ sentiment report showed an unexpected deterioration in confidence in the Euro zone economy, though the reaction in the Euro against the US Dollar was muted. With a relatively light global economic calendar for today, investors are looking forward to a barrage of economic data, especially from peripheral Euro zone economies, during the course of this week for further hints on the region’s recovery. Additionally, the Fed’s latest policy meeting minutes and developments in US fiscal logjam will give further direction to the Euro against the majors this week.

Other Currencies – Highlights

The Friday’s upward momentum in the Canadian Dollar against the US Dollar was arrested this morning amid concerns that the ongoing US government imbroglio will negatively influence the Canadian economy. After trading in a tight range against its US counterpart for most of the week, the Canadian Dollar strengthened on Friday following the release of the Ivey PMI report which showed that manufacturing activity picked up for September, although at a slower than expected pace. Going forward, markets will keep an eye on today’s domestic building permits report which is likely to show a decline for August, further pressurising the Canadian Dollar against the greenback. Later this week, labour and housing sector data along with news flows from the US political arena will be closely watched by market participants. With Canada’s economy closely linked to its southern neighbour, any negative news flows emanating from the world’s largest economy is expected to weigh on the Canadian Dollar.