US Fiscal Deadlock Nearing an End

After days of deliberations, US lawmakers seem to be agreeing to a potential deal to re-open the government and avert a potential debt default. However, with the deal expected to come in perilously close to the US Treasury’s deadline, its repercussions on the US and global economy will undoubtedly be felt, given the delay in arriving at a consensus. At home, inflationary pressures on the economy have remained firm for September. Tomorrow’s employment data will give further cues on the trajectory that the British economy is heading and the course of action that the BoE might adopt in the future. Also, the forward looking Euro zone sentiment report later today will gain focus.

Pound Sterling – UK Markets

The Pound traded on a stronger footing and breached the 1.60 mark against the US Dollar yesterday amid growing concerns over a potential US debt default. However, the upside was arrested later in the day following reports that US lawmakers had made significant progress towards reaching a temporary accord to resolve the impasse. Moreover, a lack of domestic economic triggers did little to alter market sentiment towards the Pound yesterday. Meanwhile, Sterling is trading firmer against the majors this morning following the release of the consumer price inflation report that suggests inflationary trend continue to persist. With inflation way above the BoE’s 2% target, a positive labour market data tomorrow will boost calls for a hike in interest rates sooner than forecast, thereby supporting the Pound against the majors in the near term. Later today, developments across the Atlantic, particularly in the wake of the imminent US debt ceiling deadline, will be keenly eyed for further direction to risk appetite. Additionally, the forward looking Euro zone sentiment indices data later today will influence the Euro-Sterling pair.

US Dollar – US Markets

After weakening in the initial trading session yesterday, the US Dollar pulled back against its major counterparts later in the day, as lawmakers inched closer towards temporarily raising the government’s borrowing limit and ending the prolonged shutdown. The potential stop-gap arrangement will keep the government funded through mid-January next year and extend the borrowing limit until early February 2014, even as budget talks are set to continue in the interim period. However, the US economy is expected to feel the pinch of the partial shutdown, with the GDP data expected to come in weaker for the fourth quarter. Meanwhile, the US Dollar is trading in a tight range against the common currency in today’s trading session. With US lawmakers indicating a potential, albeit a temporary end to the long drawn out policy logjam, the New York Empire State Manufacturing index later today will gain modest market attention. Additionally, speeches by influential Fed policymakers later today will be closely watched for further insights into the timing of QE3 tapering, especially in the aftermath of the protracted US shutdown.

Euro – European Markets

With US lawmakers engaged in talks over ending the budget stalemate, the Euro moved higher against the greenback yesterday, only to give up its gains later in the day, amid signs that politicians might reach an agreement in the near term. Earlier in the day, the Euro zone economy showed signs of recovery, as the region’s industrial output rose at the fastest pace since July 2011. Meanwhile, European finance ministers have opined that Ireland and Spain will soon be weaned off financial support, while adding that Greece will be extended further aid to recover from its debt crisis. The Euro is trading in a tight range against the US Dollar in today’s trading session ahead of the German and Euro zone sentiment indices data which are expected to show an improvement for October, especially in the wake of improving economic conditions in the common currency bloc. However, all eyes will be on the outcome of the last minute negotiations in the US and will determine risk appetite going forward today.

Other Currencies – Highlights

The Japanese Yen is trading almost flat against the majors this morning despite reporting weaker than expected domestic industrial production numbers and indications of the US reaching a deal to avoid a federal default. Japan’s industrial output for August was revised downwards from its preliminary estimate earlier today, primarily due to the inclusion of fresh data that were not available during the release of preliminary projection. Additionally, with US lawmakers playing the cat and mouse game over the past few weeks, investors chose to stay at arm’s length from the US Dollar until a concrete decision was announced. With little on the domestic economic calendar today, news flows emanating from both sides of the Atlantic, especially the latest updates on a potential US fiscal deal and the German forward looking sentiment data, will be closely tracked for further direction to risk appetite. Additionally, the Bank of Japan Governor, Haruhiko Kuroda’s speech scheduled on Friday is expected to gain modest market attention.