United States Dodges a Bullet

After days of wrangling and horse trading, US politicians finally nailed down a deal that will get the government up and running at least until early 2014. However, hard decisions on healthcare reforms and curbing government spending are yet to be made which will have a bearing on the US fiscal position in the long run. Meanwhile, yesterday’s Beige Book survey confirmed that the saga has proved to be a drain on the economy. In the UK, calls for raising interest rates could get stronger in the days ahead as upbeat retail sales and employment figures have offered further evidence of a sustained recovery.

Pound Sterling – UK Markets

Buoyed by the upbeat labour market data, the Pound briefly moved above the 1.60 mark against the US Dollar yesterday. While the number of people claiming unemployment benefits last month fell at the fastest pace since June 1997, the number of jobs created in the UK also rose to a record high. However, Sterling was unable to sustain its upward momentum after reports emerged that the US lawmakers had agreed on terms to end the prolonged fiscal impasse. Meanwhile, Sterling is stronger against the majors this morning, after data just released showed an increase in UK retail sales numbers for September, further reinforcing the notion of rapidly recovering consumer confidence in the British economy. However, with the US ending its budget deadlock, some downside pressure in the Pound-US Dollar pair cannot be ruled out in the near term. Later today, the US initial jobless claims data will be keenly eyed by investors, especially in the wake of last week’s inflated numbers and will provide further evidence of the effects of the protracted government shutdown on the US economy.

US Dollar – US Markets

The greenback pulled back against its counterparts late yesterday as the US lawmakers agreed to end the long drawn fiscal showdown. After days of uncertainty surrounding the budget stalemate, the US Senate and the House of Representatives passed legislation to end the 16-day partial shutdown and temporarily raise the nation’s borrowing limit, thereby averting a potential sovereign default. The US President signed the bill which will keep the government funded until the first week of February next year. Meanwhile, talks on reigning in government spending, among others are set to continue in the interim period. However, after initially strengthening against the majors following the upbeat news, the US Dollar has mellowed against the majors in today’s session amid increased risk appetite. Investors will keep a tab on the initial jobless claims numbers later today, especially after yesterday’s Beige Book report indicated subdued employment and business activity in the US for September on the back of the partial government shutdown and the Congressional impasse. Apart from the labour market report, the regional Philadelphia manufacturing survey and speeches by Fed policymakers will give further direction to traders’ risk appetite in today’s trading session.

Euro – European Markets

The common currency gave up its early gains against the greenback yesterday as US lawmakers agreed to a truce to end the 16-day partial government shutdown and avert a potential default. On the domestic front though, the final reading of the Euro zone inflation numbers for September failed to provide any upside surprises. The region’s inflation continues to remain sluggish and way below the ECB’s target rate of 2%, amid weak economic growth. Meanwhile, German Chancellor, Angela Merkel, has urged her opposition party, the Social Democrats, to set aside political differences and support her in forming the government. The single currency has strengthened and breached the 1.36 mark against the US Dollar in today’s trading session amid increased risk appetite, as traders absorbed the news of the US agreement to extend the nation’s borrowing limit. With the Euro zone construction output being the only domestic economic data scheduled for release today, Euro traders will closely follow the US initial jobless claims numbers for further direction to risk appetite.

Other Currencies – Highlights

In the wee hours of the morning today, the US debt ceiling deal ended days of uncertainty and boosted investors risk sentiment, thereby underpinning demand for high yield currencies, including the Australian Dollar. The Aussie Dollar also remained supported after data released earlier in the day showed that business confidence in Australia for the third quarter touched a two-year high, on the back of lower interest rates, improving housing market, weaker Australian Dollar and rising consumer confidence. With not much on the domestic macro front today, trading sentiment in the Aussie Dollar will be influenced by news flows from both sides of the Atlantic, particularly the US initial jobless claims report scheduled later today. Also, next week’s domestic consumer price inflation print will be closely eyed for further direction to the Australian Dollar against the majors.