Will Obama Get a Lifeline?

In a move aimed at avoiding a government default, the House Speaker, John Boehner, offered a proposal to keep the government funded until mid-November, though the partial shutdown would continue till a breakthrough is reached. The House is likely to vote on the proposal in the next few days and a failure to pass the stop-gap arrangement will once again bring policymakers to the negotiation table. At the World Bank, G20 and IMF meetings later today, policymakers from around the world are expected to urge the Obama administration to resolve the deadlock at the earliest. At home, with the BoE refraining from altering its policy stance yesterday, all eyes are set on a string of macro releases scheduled next week for further direction.

Pound Sterling – UK Markets

The BoE policy decision was in line with market expectations yesterday, with the central bank sticking to its forward guidance of not raising interest rates until the unemployment rate hits 7%, despite an improving economy. Against this backdrop, next week’s labour market data will be closely followed for ascertaining future policy direction. Meanwhile, Sterling managed to arrest its downward trend against the US Dollar yesterday, as it moved steadily higher after weakening over the past two days, even as US lawmakers moved closer to agreeing to a short term hike in the government’s debt ceiling. Meanwhile, the Pound is trading higher, although in a tight range, against the US Dollar this morning. The just released construction output data revealed that construction activity climbed at a faster pace for August. Later today, developments across the Atlantic, speeches by influential policymakers at the World Bank and IMF annual meetings will keep market participants on their toes. Going forward, Sterling investors have their plates full in terms of domestic macro releases next week, including retail sales, inflation and employment numbers among others.

US Dollar – US Markets

The US Dollar was searching for direction against the Euro yesterday amid hopes of a breakthrough in the political impasse in Washington after House speaker, John Boehner, proposed an accord to extend the government’s borrowing authority for six weeks, thereby providing both parties some time to sort out the policy logjam. Earlier in the day, Treasury Secretary, Jacob Lew, warned Congress that a last minute debt ceiling increase “could be very dangerous” for the health of the economy. Meanwhile, reflecting the damage already done by the partial government shutdown, initial jobless claims shot up sharply last week and today’s Reuters/Michigan consumer sentiment index is also expected to show a decline for October. Additionally, a Fed policymaker indicated that the central bank is unlikely to taper QE3 in its October meeting. The greenback has continued to trade under pressure against the majors in today’s trading session, as traders remain cautious ahead of a potential vote on John Boehner’s proposal in the next few days. Moving ahead, next week’s regional manufacturing indices, the Beige Book survey and in the event of lawmakers agreeing to end the US shutdown, labour market data will influence market sentiment.

Euro – European Markets

A lack of decisive domestic economic data yesterday led the common currency to trade in a tight range against the US Dollar. The fortunes of the Euro-Dollar pair will be determined by the outcome of a closely watched US political shutdown saga, especially in light of John Boehner’s recent proposal. Meanwhile, the ECB President, Mario Draghi, opined that the region’s historically low inflation poses downside risk to the nascent economic recovery, presenting a case for further reduction in the already record low interest rates. In the meantime, the single currency is trading on a stronger footing against the US Dollar this morning. With little on the domestic front to alter market sentiment, the outcome of US budget negotiations and the Reuters/Michigan consumer sentiment index will sway market sentiment in today’s session. Additionally, news flows from a couple of important meetings in the global arena will be scrutinised by market participants. In the forthcoming week, a raft of domestic macro indicators as well as important Chinese macro releases will be eyed by investors for further direction to risk appetite.

Other Currencies – Highlights

The Canadian Dollar was little changed against its US counterpart yesterday, as market participants remained on the sidelines ahead of the outcome of talks between Barack Obama and House Republicans. Although a consensus was not reached yesterday, a House vote on raising the government’s borrowing limit is expected later today. Meanwhile, with the Canadian economy showing signs of recovery lately, the important domestic labour market report later today will be keenly followed by investors. Market participants expect the economy to add jobs at a slower pace and any positive print is likely to support the Canadian Dollar against the majors today. However, with the Canadian economy closely linked with the US economic performance, any negative surprises on the fiscal front will have an impact on the Canadian Dollar in the near term. Next week, consumer price inflation data in Canada will be closely watched for further direction.