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US government shutdown enters 3rd day

Government_shutdownDay three of the US government shut down.


Politicians are still refusing to come to an agreement with president Obama and the government operations remain in limbo. Obama’s meeting with Congressional Leadership yesterday made it clear that he was not going to negotiate in order to reopen the government or raise the borrowing capacity of the United States, reiterating his view that the House should pass a clean government funding bill and not hold the economy hostage.

How is this whole fiasco affecting financial markets?!

The USD currency hsa dropped below 80.0 for the first time since February, however this might be driven by EUR. Gold futures are down to under $1,300/ounce, while WTI for delivery in December is changing hands just south of $104/barrel.

The EUR has surged to eight month highs, making a play to establish itself above the 1.36 level against the USD after comments yesterday by Mario Draghi(EU central bank president) ended hopes of immediate policy action to stimulate the fragile recovery in the economic bloc. While Draghi was dovish, he made sure to mention that the level of the EUR was not a target, and that the ECB stood ready to utilize rate cuts and additional LTRO’s if further support for the banking system is required. 

The not so positive data from the PMI releases by Germany and Spain both slumped to 2-month lows, with Germany at 53.2 while Spain went down under 50.00 to 49.6. 

While the EUR has been on a positive run over the last week, there are many things yet to be rsolved in the zone, Draghi seemed cautious on the press conference yesterday(Oct 2nd 2013). EUR longs would want to take advantage of the strength we’ve seen in the EUR and take some profits. Headlines that mention Draghi has asked an ECB panel to study new bank funding measures to deal with another liquidity shortage (i.e. Fed taper), give the impression there are still underlying issues with the liquidity transmission mechanism.

Non-Manufacturing PMI in the USA came in much lower at 54.4 vs 57.2 expected, which saw the dollar weken even further, the EUR traded hands at about 1.3630 compated to 1.3590 before the released. Without the release of the durable good number today because of the government shut-down, the ISM PMI will gain more prominence as investors assess the health of the American economy, and further USD weakness is to be expected. 

The US gvernment shut down remains a top news item being followed by market participants and any resolution might give the USD a boost.



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