US on the Brink

The continuing negotiations in Washington failed to provide a tangible outcome yesterday and as per US Treasury estimates, the world’s largest economy is just a day away from defaulting on its debt obligations. In the midst of the complex political equation in the US, market participants will closely follow the eleventh-hour tussle among legislators to concur on action for avoiding the embarrassment of a potential default. At home, today’s employment data confirmed that the labour market continued to reap the benefits of the positive domestic environment, thereby raising the possibility of an earlier than projected interest rate hike by the BoE. Apart from the US fiscal conundrum, the game of post-election political brinkmanship in Germany will also gain market attention.

Pound Sterling – UK Markets

The Pound weakened against the US Dollar in early trading yesterday after annual consumer price inflation in the UK unexpectedly held steady at 2.7% for September. However, Sterling recovered from its early weakness and moved higher against the greenback as US lawmakers, yet again, failed to broker a deal to raise the government’s debt ceiling. The Pound also strengthened against the Euro yesterday following the release of weaker than expected Euro zone economic sentiment data for October. Meanwhile, Sterling is trading on a stronger footing against the majors in today’s trading session after data just out showed a fall in the number of workers claiming jobless benefits for the tenth straight month, while the unemployment rate remained steady for August. Against the backdrop of a steady improvement in the labour market, it remains to be seen whether the BoE Governor alters his policy targets going forward. Additionally, tomorrow’s domestic retail sales data will provide further insights into the progress of the domestic economic recovery. However, market participants will scrutinise every move of US lawmakers today ahead of tomorrow’s debt ceiling deadline.

US Dollar – US Markets

The US Dollar moved higher against the common currency yesterday following weak Euro zone sentiment data. However, the upside was capped in the latter half of the trading session yesterday after it became increasingly apparent that the Senate was nowhere close to agreeing to the proposed debt ceiling plan. Adding to the government’s woes, Fitch placed its “AAA” credit rating on the US to negative watch, indicating that the ongoing Congressional impasse could undermine the US Dollar’s role as a reserve currency. Moreover, the disappointing New York manufacturing survey report further pressurised the greenback against the majors. In the midst of the gloom surrounding the economy, two influential Fed officials have indicated that the central bank is unlikely to trim its QE3 programme this month. Meanwhile, the US Dollar is trading under pressure against the majors this morning ahead of today’s Beige Book survey report and speeches by Fed officials. US politicians continued with their prolonged negotiations yesterday and with more of the same expected today, market participants are getting increasingly jittery on the prospect of a US sovereign default.

Euro – European Markets

The common currency weakened against the majors yesterday after the Euro zone economic sentiment index showed a weaker than expected print for October. However, German investor expectations for the future climbed to the highest level since April 2010, indicating a more optimistic attitude over the future of the economy. Additionally, in an attempt to overcome the debt burden and spur economic growth, Portugal and Italy have introduced fresh measures to meet their respective 2014 budget deficit targets. However, the downside was limited amid the continued US budget and debt ceiling showdown. The common currency has failed to gain traction in today’s trading session amid reports that coalition talks between the German Chancellor, Angela Merkel and the Green Party have failed. The German Chancellor will now seek support from her opposition party, the Social Democrats, to form a government. Later today, the revised Euro zone inflation numbers will be keenly eyed by traders and any downside surprises on this front will weigh on the Euro’s performance. Also, the latest developments in the US budget saga and the ECB President, Mario Draghi’s speech will influence risk sentiment in today’s session.

Other Currencies – Highlights

The New Zealand Dollar has gained traction against the majors this morning following the third quarter consumer price inflation inching up to 1.4%, the highest in 18 months and within the central bank’s target band of 1% to 3%. Although an accelerating inflation trend does not guarantee an imminent rate hike, it does put the Reserve Bank of New Zealand on a better footing to do so, if warranted. Additionally, persistent concerns regarding the US budget impasse and fears of a potential US default underpinned the demand for the Kiwi Dollar. Going forward, market participants will keep a tab on the domestic consumer confidence data due overnight for further direction. However, market appetite towards the Kiwi Dollar and other high yield currencies is expected to remain supported, if US lawmakers fail to reach an amicable solution to the fiscal woes at the earliest.