US Lawmakers Fail to Compromise

With neither side willing to budge from their respective stands, there seems to be no headway in US budget talks, even as the economy continues to suffer from the prolonged partial government shutdown. While a US default remains within the realms of possibility, a last minute deal to extend the debt ceiling still looks likely, given the potential damage to US credibility in the event of a default. At home, with the latest economic data surprising market participants on the downside, this week’s important labour and consumer price inflation data will provide further indication to the strength of the economic recovery. Across Europe, markets will eye today’s industrial production data in the Euro zone for further direction.

Pound Sterling – UK Markets

A lack of decisive domestic economic data and hopes of an end to the US fiscal showdown dragged the Pound lower against the US Dollar on Friday. However, the downside was limited amid signs of waning US consumer confidence, as indicated by the weak Reuters/Michigan consumer sentiment report. Meanwhile, construction output in the UK rose for the third consecutive month for August on the back of rising demand for new homes, suggesting a robust housing sector. However, Sterling is trading on a stronger footing against the greenback this morning following another round of failed negotiations in the US over the weekend on raising the government’s debt ceiling. With little on the global economic calendar today, market participants will closely follow the ongoing US budget talks for further direction to risk appetite. In the wake of the BoE linking its future monetary policy decision to the labour market and to some extent the nation’s inflation, tomorrow’s consumer price inflation and Wednesday’s employment data will influence sentiment of Sterling investors in the near term. Also, the domestic retail sales report and a host of global macro events will be eyed for further direction.

US Dollar – US Markets

Amid market speculation that US lawmakers are close to arriving at a consensus to extend the government’s borrowing limit and thereby avoid a potential default, the US Dollar traded mostly higher against most of its major peers on Friday. However, US lawmakers over the weekend failed to agree to yet another proposal for a short-term deal on raising the debt ceiling. With the US shutdown entering its third week and no signs of compromise on the standoff, the greenback has weakened against the majors in today’s trading session. Central bankers and financial leaders attending the G20, IMF and World Bank meetings over the weekend also warned that a failure to fix the fiscal standoff would lead to a US default and have dire consequences on the global economy. On the macro front, the latest set of economic releases signals some weakness in the US economy. Thursday’s initial jobless claims report hinted towards deteriorating labour market conditions in the aftermath of the prolonged shutdown, while the Reuters/ Michigan consumer confidence index for October also dropped to a nine-month low. During this week, US budget talks is the key event likely to heighten volatility going forward.

Euro – European Markets

The common currency traded in a tight range against the US Dollar in Friday’s trading session. The stable consumer price inflation numbers in Germany failed to inspire confidence among investors, as traders adopted a largely wait and watch approach amid the ongoing budget and debt negotiations in the US. However, with US lawmakers again failing to arrive at a consensus to hike the debt ceiling over the weekend, the Euro has strengthened against the greenback in today’s trading session. With Thursday’s deadline to avert an unprecedented US sovereign default fast approaching, a failure to reach a consensus will have catastrophic consequences for the US and global economy. Meanwhile, today’s Euro zone industrial output data is expected to show a positive print for August and will offer further support to the Euro against the US Dollar. Additionally, the EU finance ministers meeting today is expected to attract modest market attention. In the week ahead, apart from the outcome of the US fiscal dilemma, the German and Euro zone forward looking sentiment indices and the Euro zone consumer price inflation data will determine trading sentiment in the Euro-US Dollar pair.

Other Currencies – Highlights

The Australian Dollar has weakened marginally against some majors this morning following weaker than expected Chinese trade data released over the weekend. China, Australia’s largest trading partner, reported an unexpected decline in exports for September, thereby hitting the Aussie Dollar. Additionally, downbeat domestic housing sector data released earlier today further weighed on performance. However, the Aussie Dollar’s slide against the greenback was limited amid concerns surrounding the ongoing US shutdown and the debt ceiling impasse. With a relatively light global economic calendar today, market participants are looking forward to tomorrow’s minutes of the Reserve Bank of Australia’s last policy meeting for further direction to risk appetite. Additionally, traders will eye the domestic business confidence report, along with a string of important Chinese economic data, including the third quarter GDP, industrial production and retail sales data, during the course of the week for further direction to the Aussie Dollar against the majors.