October 17th is looming ever closer on the horizon. No deal has been struck between the US Senate and the US congress. The US remains partially shut down. Will the debt ceiling be lifted? Quite simply it has to be lifted. Should a deal not be struck by October 17th then the US Government defaults on its debt, bills will go unpaid and the US loses its role as the “anchor of the financial system”. The ramifications for the World economy don’t bear thinking about especially with the US Dollar being the world’s reserve currency. The US are now being criticised from countries that the US normally wag a finger at for their economic policy. I think we’ll see an eleventh hour reprieve as I just don’t think US politicians can afford (literally and figuratively) to continue their impasse.EUR/USD? To say it’s exciting would be like saying watching Downton Abbey is enjoyable. We’re stuck in a range now between 1.35 and 1.36 with little clear direction if we’re going to push higher. I favour some EUR weakness this week so we should see a gradual pullback on EUR/USD. This move will of course be aided/hindered by the USD so once again the US Dollar will be the currency in focus this week.

What will all this political posturing mean for the US Dollar? The dollar has been quite resolute since the partial shutdown. Investors and traders are concerning themselves less with commentary from politicians this time round and will wait and look at the bigger picture come the end of the week. I think most expect this to be resolved otherwise the US Dollar would be significantly weaker. On GBP/USD we’re drifting as suggested last week in a tight range. If you’re a buyer of USD from GBP look at orders at the 1.60 level for this week. This is likely to be toppish. We’ve been around the 1.5950 level in recent trade sessions and Cable is finding it tough to gain a firm hold on the upside. Contact myself or one of the trading team to implement orders at the 1.60 level.

I see two possible scenarios for the USD towards the end of the week. Should the debt ceiling be lifted then we’ll see USD strength meaning if you’re a seller of USD and buyer of GBP then you’ll be in a better position. Look to place sell orders below 1.59 if you can. The other scenario (which I doubt will happen) will be something close to what happened in the aftermath of Lehman Brothers. If not far far worse. Should no agreement be reached then we’ll have considerable USD weakness meaning we could quite conceivably trade anywhere from 1.65-1.70. I doubt this will happen however it is a possibility.

GBP/EUR? We’re back under the 1.18 level. As suggested last week if you can achieve 1.18 and cover off some of your exposure it may be wise to do so. Contact one of the trading team to discuss. We’re light on data today however we have data out tomorrow/Wednesday/Thursday. First up tomorrow we have some UK inflation data out in the form of CPI (YoY) (Sep). This figure will likely be crucial to Sterling’s direction this week. The figure is released at 09.30am UK time so expect some volatility. We have the ZEW survey out from Germany 30 minutes after the release of the UK data so we could see GBP/EUR either drop off quite significantly to below 1.17 or see us push through the 1.18 level and settle above there depending on how the data looks. If you have a requirement coming up this week it may be wise to implement orders this afternoon in preparation for tomorrow morning. Wednesday we have further UK data out in the form of the Claimant Count change (Sep) and also the ILO Unemployment rate (3M) (Aug). On Thursday we have UK Retail Sales released at 09.30am. Tuesday, Wednesday and Thursday will be important for Sterling so have any orders in place prior to try and achieve the high in the market on an intraday basis.

This could be quite an historical week in the financial system should politicians not come to agreement. More likely is a deal reached overnight, financial Armageddon averted (again), some slight USD strength and we’ll no doubt have the same conversation in 2014 when the debt ceiling becomes an issue again for Congress.

It’ll be an interesting week with a lot of data released and potential for some major movements in the currency markets. Look to speak with one of our trading team to put a strategy in place for this week.

Have a great week.

Written by Liam Alexander