Fears of US hitting debt ceiling cause USD decline

Tom Tong26/Sep/2013Currency Updates

GBP

Yesterday saw another strong day for sterling as it rallied against the dollar and the euro, retracing its losses from Tuesday and ending the European trading session on a week to date high.

Although buoyed by positive data out of the UK, with retail sales climbing to a 15-month high, this strength can be attributed to the continuing weakening of the dollar as well as a growing unease as to whether the EU is able to continue its path from recession.

There is a growing consensus that the UK will be unable to sustain it’s current economic growth and it is likely that sterling is likely to depreciate in the short to long term.

Yesterday saw the markets affected by both Chancellor George Osborne announcing that he would lodge a challenge to the EU’s planned bank bonus cap and Labour leading Ed Milliband’s announcement that if he were to win the next general election he would freeze energy bills for 20 months, thus leading to a 6% drop off in the leading energy companies share prices.

There is a number of news releases from the UK today including GDP figures YoY forecasted to stay at 1.5% and QoQ expected to rise from 0.3% to 0.7%. Moreover, Total Business Investment figures expected to rise from -1.9% to 0.9% and the Gfk Consumer Confidence survey expected to rise from -13 to -11.

EUR

Business activity in the eurozone increased at its quickest rate for more than two years this month according to surveys. August saw a positive move in the Markit PMI from 51.5 to 52.1. The second quarter of this year saw the eurozone’s GDP had increased by 0.3%. Contrastingly, employment figures remain on the decrease, though displaying its lowest decline in 18 months.

France has revealed its budget proposal for 2014. French Finance Minister Pierre Moscovici commented on the core aims of the plans saying “(it) has two objectives, Stimulate growth and boost jobs”. Conversely, in an effort to bolster competitiveness amongst businesses by means of lightening the tax load imposed on them, households will be subjected to higher taxes in a bid to decrease the shortfall, leading to adverse effect on purchasing power. The French Finance Minister stated the public deficit objective is to achieve a rate of 3.6% of its GDP. Furthermore, in a bid to diffuse the anger stemming from further tax increases, the French government has announced a 15bn EUR cut in order to strengthen its public spending.

This month has seen a positive move in Italian consumer confidence to 101.1, off the back of the eurozone’s tenuous upturn from an 18-month recession. Going by official statistics published yesterday, Italy has not seen this indicator at such optimistic levels since August 2011. Figures above the 100 benchmark indicate confidence amid the bulk of consumers. This figure is anticipated to rise to 100.4.

Europe’s largest economy Germany, also saw a rise in consumer confidence this month, according to Germany’s largest research institute GfK. Data released displayed figures that have not been recorded since before the financial crisis reaching a 6-year high. Business activity has increased at its fastest level for eight months.

In Greece, Finance minister Yannis Stournaras has commented on the progress of the troubled states economy saying it is moving “slowly towards recovery” after seeing growth in the second quarter of this year. He went to state that he anticipated the Greek economy to see a contraction of up to 3.8% this year, a substantial development from the recorded contraction of 6.4% in 2012.

Today there is no data of tier one status out of the eurozone, however we await the M3 Money Supply YoY, which is the change in the total quantity of domestic currency in circulation and deposited in banks.

USD

The USD was one of the worst performing currencies yesterday, as the political turmoil concerning the U.S debt ceiling continues to haunt market sentiment. It was down against its most traded pairs and the dollar index slipped.

The US will hit its debt ceiling by 17 October and this will leave them with half the money needed to pay its bills. Currently for every dollar printed 19 cents is directly paying off US debt. The debt ceiling refers to the levels of debt deemed acceptable by the US government. As ever the usual mud slinging between Democrats and Republicans is being played out. Obama and the Democrats will not agree with the Republicans demanded budget cuts in return for a rise in the borrowing limit. The current debt ceiling is at $16.7 trillion. Obama has not named a exact increase desired in the debt ceiling. He proposes tying the debt ceiling to American GDP, which at present is at its highest since the crisis. The opposition claims this is unwise and would be difficult to control. The Republicans are also using this as a opportunity to roadblock Obama’s healthcare reforms.

The lights going off in the White House clearly is not possible, a deal will be struck, the play is just political plotting and point scoring. However Investors and traders are starting to get jumpy. The debt ceiling crisis coupled with QE speculation makes for an uncertain environment. In uncertainty most have the tendency to be defensive in there positions. The market is shaping up with the belief that the FED is unlikely to begin the QE taper until micro and macro data sees greater improvements.

Data out of the U.S yesterday was a contrast to a weak dollar. Durable goods, beat expectations of a 1.5% drop. However they have been revised downwards for July to reflect a 8.1% overall drop. Mortgage Applications also rose however rates have slipped due to interest rates. New home sales were also up but their lowest level since 2013. This at a time that real estate sales are typically at there highest for the year overall. The overall slowdown is a direct result of interest rates weighing on the economy.

Important U.S data releases today are- GDP and Jobless Claims. There is a 7 year bond auction taking place.

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Written by Tom Tong

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