US debt negotiations have continued to be monitored closely as congressional representatives and President Obama discussed the possibility of a short-term compromise to raise the debt ceiling. Republicans have proposed a 6-week extension and, although there was no deal and Democrats remained very sceptical, there was optimism that an arrangement could be secured over the weekend. With a Japanese holiday on Monday, there was a reluctance to hold short dollar positions during Friday.
From a longer-term perspective, there were expectations that the Bank of Japan would maintain a highly-expansionary policy and introduce further monetary easing next year. The dollar pushed higher again with a test of resistance above the 98.50 level.
There was a decline in the US University of Michigan consumer confidence index to 75.2 for September from a final 77.5 the previous month. Current conditions held firm, but there was a significant decline in the expectations component which potentially reflected an early impact of the government shutdown. Markets were potentially braced for a steeper downturn and there was no measurable dollar reaction as markets wound down ahead of the weekend.
Market positioning tended to dominate on Friday and EUR/USD initially moved higher to test the 1.3580 area. A failure to break resistance, triggered a correction back towards 1.3550 with the dovish ECB stance also restraining the Euro. The dollar was still unable to gain any significant traction on expectations of delayed Fed tapering. Given the important of US budget negotiations, there will be the potential for sizeable opening gaps in Asia on Monday.
Sterling initially maintained a firmer tone on Friday as it attempted to regain losses seen over the previous 48 hours. GBP/USD pushed to the 1.60 level before hitting resistance and reversing back to below the 1.5950 level as Sterling nursed significant weekly losses. Markets remained on alert for further evidence on the UK economy with an underlying suspicion that Sterling had priced in all available good news as EUR/GBP probed resistance above 0.85.
There was a mixed Canadian labour-market release with a smaller than expected increase in employment, but the unemployment rate fell to 6.9% from 7.1% and USD/CAD continued to consolidate in the 1.04 region.