Forex Analysis: Dollar to Fall if US Officals Reach Fiscal Cliff Deal

DailyFX

The US Dollar is likely to weaken against most of its top counterparts if US lawmakers manage to secure a deal avoiding the fast-approaching “fiscal cliff”.

Talking Points

  • US Dollar to Decline if US Policymakers Secure “Fiscal Cliff” Accord
  • Japanese Yen Sold on Speculation Abe Government to Debase Currency

The spotlight remains on Washington, DC as financial markets return from the Christmas holiday, where US policymakers have a mere five days left to deliver a deal avoiding the so-called “fiscal cliff”, a set of tax hikes and government spending cuts due to trigger at the turn of the year. The Congressional Budget Office (CBO) projects the jolt of austerity will tip the US back into recession.

The markets’ baseline scenario appears to call for a last-minute compromise that avoids an immediate fiscal shock but falls short of setting US public finances on a sustainable long-term path. The emergence of a loose framework for negotiating a “grand bargain” in the future also seems to be baked in.

While a watered-down accord is undeniably better for market-wide risk appetite than none at all, follow-through is likely to be limited to a short-term advance reflecting the dissipation of uncertainty. Indeed, with investors’ forecasts validated, the impetus for speculation evaporates.

For forex markets, a fiscal cliff deal is likely to broadly weigh on the US Dollar amid ebbing safe-haven demand for the benchmark currency. A lone exception may be found in the greenback’s pairing with the Yen, where the focus remains on domestic policy. Indeed, the Japanese unit hit a 20-month low against its top counterparts overnight amid speculation incoming Prime Minister Shinzo Abe will push to sharply weaken the currency in a bid to beat deflation.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

1:30

CNY

Industrial Profits YTD (YoY) (NOV)

3.0%

-

0.5%

4:00

JPY

Vehicle Production (YoY) (NOV)

-8.4%

-

-12.4%

5:00

JPY

Housing Starts (YoY) (NOV)

10.3%

10.7%

25.2%

5:00

JPY

Construction Orders (YoY) (NOV)

-2.1%

-13.8%

5:00

JPY

Annualized Housing Starts (NOV)

0.907M

0.911M

0.978M

Euro Session: What to Expect

GMT

CCY

EVENT

EXP/ACT

PREV

IMPACT

7:00

CHF

UBS Consumption Indicator (NOV)

1.23 (A)

1.30

Low

7:45

EUR

French Consumer Confidence Indicator (DEC)

86 (A)

84

Low

7:45

EUR

French Producer Prices (NOV) (MoM)

-0.5% (A)

0.5%

Low

7:45

EUR

French Producer Prices (NOV) (YoY)

1.9% (A)

2.8%

Low

9:00

EUR

Italian Business Confidence (DEC)

88.8

88.5

Low

9:00

EUR

Italian Economic Sentiment (DEC)

-

76.4

Low

9:30

GBP

BBA Loans for House Purchase (NOV)

34500

33039

Medium

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3178

1.3300

GBPUSD

1.6108

1.6170

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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