A Stop Gap Debt Ceiling Solution Would be a Drag for USD

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It appears Washington will probably just manage to thrash out a deal to lift the US debt ceiling at the last minute. But it will likely be a stop gap solution meaning fears over a US debt default will be visited more regularly with long-term negative implications for USD.

Any deal that stops the US from defaulting on its debts this week is likely to spur a relief rally for USD that would probably last into Friday – with plenty of short-covering.

debt ceiling ahead

Image Credit: Image credit: jjvallee / 123RF Stock Photo

By Justin Pugsley, Markets Analyst MahiFX Follow MahiFX on twitter

But such are the political divisions in Washington is that the best they may be able to manage is to lift the debt ceiling for a few months to buy more time to squabble. And there’s a risk that ever more regular debt negotiations will become a part of the US political landscape as ideological divisions run so deep. A case of moving from one short-term sticking plaster solution to another.

That will massively complicate the US Federal Reserve’s monetary policy operations. Anticipating the damage constant debt ceiling negotiations will do to the economy, the Fed is likely to delay tapering their quantitative easing programme well into next year. The US economy still appears fragile and not strong enough to deal with fiscal shocks and constant political uncertainty.

EUR/USD waiting for news catalyst from Washington

EURUSD technical chart on the background of the debt ceiling upcoming resolution October 16

Doomsday delayed

Looking towards Thursday there is still a possibility that there won’t be an agreement in Washington. That may not necessary lead to a savage sell-off of the USD, at least not straight away, though weakness would be very likely.

It is possible that the US Treasury could push the default date back a bit – probably by shutting more parts of the government to divert cash to pay Treasury coupons. Nonetheless, if Thursday comes and goes with no deal, it will put currency and asset markets on tenter hooks.

At that point the Fed and other leading central banks will be dusting off contingency plans on how to cope with a historic default of the world’s largest economy, the holder of the world’s reserve currency with the largest most liquid financial markets. Hopefully, US politician won’t test those plans – much more is at stake than their cherished ideological positions.

Further: EUR/USD dips below double support

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About Author

MahiFX is headed by David Cooney, former global co-head of currency options and e-FX trading at Barclays Capital and responsible for the award winning e-commerce platform BARX and Susan Cooney, former head of e-FX Institutional Sales in Europe for Barclays Capital. Operating as a market maker, MahiFX provides traders direct access to institutional level execution speeds and spreads through its proprietary-built fully automated pricing and risk management technology, lowering the cost of retail forex trading. MahiFX global operations are headquartered in Christchurch, New Zealand with offices in London, UK with development and support teams in both locations for 24 hour service. The company is regulated by The Australian Securities and Investments Commission (ASIC), Australia’s corporate, markets and financial services regulator. Article by Justin Pugsley, Markets Analyst MahiFX  Follow MahiFX on twitter and on facebook  Disclaimer: This material is considered a public relations communication for general information purposes and does not contain, and should not be construed as containing, investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. MahiFX makes no representation and assumes no liability as to the accuracy or completeness of the information provided. The use of MahiFX’s services must be based on your own research and advice, and no reliance should be placed on any information provided or comment made by any director, officer or employee of MahiFX. Any opinions expressed may be personal to the author, and may not reflect the opinions of MahiFX, and are subject to change without notice

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