The main media focus was on the US government shutdown during Tuesday, although the overall market reaction was generally measured and there was no serious deterioration in risk appetite. Congress was unable to find a budget resolution ahead of the deadline which triggered a partial closure of the Federal Administration.
The dollar remained fragile initially and dipped lower against the Euro as EUR/USD moved to a peak above 1.3580 early in Europe while USD/CHF tested support below the 0.9000 level for the first time this year.
There was no surprise surrounding the Australian Reserve Bank’s interest rate decision with the benchmark rate left at 2.50%. The overall tone within the policy statement was broadly neutral, but slightly less dovish than expected and this did trigger a sharp recovery in the Australian dollar. With a squeeze on short positions, AUD/USD rallied to a high above 0.9430 before correcting lower.
The final European PMI manufacturing index was unchanged from the flash estimate at 51.1 for September and the overall unemployment rate was slightly lower than expected at 12.0%. Both the Italian and German unemployment releases were weaker than expected and there was also some disappointment in the PMI data for peripheral economies with Spain and Italy registering small declines from the previous month.
The Italian political situation remained a significant focus during the day. There were further reports that more moderate elements in the centre-right PDL could support Letta’s government in any confidence vote which would ease immediate stresses and there was a decline in Italian yields.
There was uncertainty surrounding Friday’s US payroll report as it is liable to be delayed by the government shutdown. The ISM manufacturing release went ahead as planned and was stronger than expected with a rise to 56.2 from 55.7 the previous month with the orders component again above 60 while the employment index also strengthened for the month. EUR/USD edged back to the 1.3530 area following the release with the Swiss franc also weaker and USD/JPY moved above 98, although still registering net losses for the day.
The UK PMI manufacturing index was slightly weaker than expected at 56.7 for September from a revised 57.1 previously and this was the first below-expectation reading for six months. The data was still relatively firm, especially for the employment component, but there was a slightly more cautious tone following the release as GBP/USD hit resistance at nine-month highs above 1.6250 and moved back towards 1.6200.