Currency markets continue to dither between the US debt ceiling issue and eurozone peripheral debt worries. In spite of a lack of agreement to raise the debt ceiling, with House Republicans failing to back a bid by House speak Boehner, the Greenback in fact strengthened towards the end of last week as eurozone peripheral issues came back under scrutiny.
The strength of the Dollar to the lack of progress in raising the debt ceiling is remarkable and exposes the single European currency even uglier than the USD, in many investors’ eyes.
The key drivers for the week ahead will depend on the scale of any boost in the debt ceiling and additional budget deficit reduction methods. If a deal is reached ahead of the August 2 deadline it is not clear that the Dollar and risk currencies will enjoy a rally unless the debt ceiling deal is a solid and major one.
Given the limited market follow through, following the recent deal to provide Greece with a second bailout, the EUR remains wholly unable to capitalise on the USD’s woes.
A reminder that all is not well was the fact that Moody’s ratings agency placed Spain’s credit ratings on review for possible downgrade while reports that the Spanish parliament will be dissolved on September 26 for early elections on November 20 will hardly help attitude for the EUR. Compounding the Spanish news doubts that the EFSF bailout fund will be ready to lend to Greece by the next tranche deadline in mid-September and whether Spain and Italy will participate, have grown.
This week we have key data releases which are likely to gather FX market attention, with central bank decisions including the Bank of Japan, European Central Bank, Bank of England, Reserve Bank of Australia and US July jobs report. None of the central banks are likely to shift policy rates.
The potential danger for the USD this week is not only that there is disappointing result to the debt ceiling discussions, but also that there is a weak outcome to the US July jobs report. An increase of around 100k in payrolls, with the unemployment rate remaining at 9.2%, will fixate market attention on weak growth and if this increases expectations for a fresh round of Fed asset purchases the USD could be left rather vulnerable.
So far today we have had UK CPI manufacturing which came in at a disappointing 49.1 down from revised 51.4 in June and some way below median forecast of 51.0.Cable now currently sits at 1.6417 from a high of 1.6475 and 1.1390 against the Euro from a high of 1.1450….bad start to the week for the pound.
