EUR/USD – Congress Reportedly Close to Deal on Debt Limit

The US dollar has posted gains on Tuesday, as the pair trades in the low-1.35 range in European trading. High-level talks continue in Washington, as the sides race against the clock to reach an agreement on raising the debt ceiling before Thursday. In economic news, German Economic Sentiment looked sharp, rising to its best level in over three years. In the US, the markets will be keeping an eye on the Empire State Manufacturing Index. As well, Federal Reserve Chair Bernard Bernanke will deliver remarks in Mexico City.

Politicians in Washington are racing to reach some agreement before the US hits the debt ceiling on Thursday. If Congress fails to agree on raising the debt limit before then, the US treasury will be unable to pay the country’s bills. This could lead to the US defaulting on its debt, which could cause chaos in the domestic and international markets. High-level talks over the weekend failed to break the impasse, but Senate Majority Leader Harry Reid sounded optimistic on Monday, saying that the sides had made “tremendous progress”. The talks are focusing on raising the debt ceiling for several more months until a more comprehensive agreement can be reached. Presumably, an agreement would also end the government shutdown, at least temporarily, allowing the government to resume operations.

The debt ceiling crisis is generating headlines the world over, as a US default on its financial obligations could lead to severe damage to the global economy. The US is being urged to get its act together, and quickly. The IMF has warned that the continuing uncertainty emanating out of Washington could lead to a world recession. ECB President Mario Draghi has also weighed in, saying that it was “unthinkable” that Congress would not reach an agreement on the debt ceiling.

QE tapering, one of the hottest topics in the markets just a few weeks ago, has quickly moved to the backburner, courtesy of the budget and debt ceiling crises which have gripped Washington. Last week, the Fed released the minutes of its September policy meeting. At that meeting, the Fed surprised the markets by not reducing its bond-purchasing program, which currently runs at $85 billion/mth. The minutes stated that the decision not to begin tapering was a “close call”. This has raised speculation that we could see tapering before the end of the year. However, the Fed is reluctant to make any major moves in the midst of the political crisis the US is currently experiencing. As well, the Fed is “data dependent”, and key releases such as Non-Farm Payrolls have been suspended to the shutdown. This has made it difficult for the Fed to get an accurate picture of the true state of the economy. This means that the Fed is unlikely to press the QE trigger before December at the earliest.

There was good news out of Germany on Tuesday, as German ZEW Economic Sentiment continues to improve. The key indicator climbed to 52.8 points in September, its highest since March 2010. Eurozone ZEW Economic Sentiment rose slightly to 59.1 points,
but this was short of the estimate of 59.4 points. Still, the markets should be pleased with this release, as it is also a multi-year high.

EUR/USD for Tuesday, October 15, 2013

EUR/USD October 15 at 9:40 GMT

EUR/USD 1.3506 H: 1.3571 L: 1.3499

EUR/USD Technical

• EUR/USD is losing ground, as the pair tests the 1.35 line in the European session.
• The pair is facing resistance at 1.3585. This line has gained some breathing room as the pair trades at lower levels. This followed by resistance at 1.3649, which has held firm since early February.
• EUR/USD is testing support at the round number of 1.35. Will this key line hold firm? This is followed by stronger support at 1.3410.
• Current range: 1.3500 to 1.3585

Further levels in both directions:

• Below: 1.3500, 1.3410, 1.3335, 1.3162 and 1.3100
• Above: 1.3585, 1.3649, 1.3786, 1.3893 and 1.4000

OANDA’s Open Positions Ratio

EUR/USD ratio continues to be dominated by short positions, indicating a strong trader bias towards the US dollar posting gains against the euro.

The US dollar has flexed some muscle against the euro on Tuesday. If there are further reports of progress in the debt ceiling crisis, we could see further movement from EUR/USD during the North American session.

EUR/USD Fundamentals

• 1:00 Federal Reserve Chairman Bernard Bernanke Speaks.
• 6:00 German Import Prices. Estimate 0.0%. Actual 0.1%.
• 6:45 French CPI. Estimate -0.3%. Actual -0.2%.
• 9:00 German ZEW Economic Sentiment. Estimate 49.2 points. Actual 52.8 points.
• 9:00 Eurozone ZEW Economic Sentiment. Estimate 59.4 points. Actual 59.1 points.
• All Day – ECOFIN Meetings.
• 12:30 US Empire State Manufacturing Index. Estimate 8.2 points.
• 14:00 FOMC Member William Dudley Speaks.

*Key releases are highlighted in bold

*All release times are GMT

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