From European debt to the US sequester


As we come to the end of the week, it will be interesting to see how the FX markets react to the possible beginning of “sequestration” tonight at midnight. The President will meet today with congressional leaders in an attempt to avert the $85 billion in federal spending cuts that are set to begin before midnight tonight.

All the “biggies” are expected to attend with John Boehner, Mitch McConnell, Harry Reid and Nancy Pelosi in attendance at the morning meeting. Both parties remain stubbornly stuck with their positions on how to replace the cuts that will total $1.2 trillion over the next nine years. The $85 billion in cuts will occur over the remaining seven months on this fiscal year.

The President has until 11:59 pm this evening to put the cuts into effect. Each party had its own proposal rejected by the other party in the Senate yesterday and there is no additional congressional action planned before the cuts would take effect. The DOW seemed to be more effected by these events than the USD yesterday, as stocks gave back their gains. The S&P ended down 0.1% after being as higher during the day and the DJIA fell 0.2%.

Today will no doubt include plenty of finger pointing by congressional leaders but an outcome and solution is doubtful. Instead we will hear about lost jobs, furloughs of Federal employees, loner delays at airports and cutbacks at national parks and monuments due to the cuts.

At the present time the USD seems somewhat immune to the “goings on” in Washington as traders are focused more on Italy than the United States. The continuing election saga has kept pressure on the EUR. Earlier this morning, the EUR had jumped to the 1.3100 level after the manufacturing sectors in France, Germany and the Euro zone showed improvements in February, although all three were still below the 50 level. On the other hand, Italian unemployment rose to 11.7%, which was higher than expected. After poking its head slightly above 1.3100, to 1.3101, the EUR has retraced and broken back below the 1.3050 area as I write this at 4:45 am.

Adding to the EUR’s woes are comments coming from analysts that the Netherlands is joining France on the watch list’s of rating agencies leaving it vulnerable to a potential downgrade later this year.

The range for the EUR seems to be set for the rest of today. There is strong support at the 1.3000 level and apparently just as strong resistance at the 1.3100 level, so I would not expect much today. Traders will keep an eye on Washington, but it is doubtful anything significant will happen until after the markets close for the weekend. Technically. a lower close today in EUR put pressure on the currency for the coming week.

There isn’t much to report on the other currencies. The commodity currencies, AUD, CAD and NZD remain week. USD/JPY is trading in a tight range ahead of next week’s expected confirmation of Kuroda as the new head of the BOJ.

Further reading: All hands on deck – rough waters ahead for the pound

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Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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