FX Market Summary 10-16-2013: Fresh hope underpins the dollar

Markets have spent another 24 hours monitoring and reacting to the ebb and flow of US political developments with continuing uncertainty and confusion.

The dollar dipped lower again in New York on Tuesday as congressional talks broke down and Fitch put the US credit rating on negative watch due to the current budget impasse. The agency also warned that it could downgrade the rating even if a deal is reached given the underlying partisanship and brinkmanship. USD/JPY dipped to the 98 area before recovering ground in Asia.

There was still a reluctance to buy the yen given expectations that a US deal would eventually be reached and global risk appetite held firm on hopes for loose international monetary policies. Underlying confidence in Japanese fundamentals also remained low which curbed yen demand with USD/JPY pushing back to near 98.50.

The Euro-zone data releases had very little impact as a consumer inflation reading of 1.0% reinforced expectations of a dovish ECB policy stance and potential for additional policy action if deflation fears increase further.

The dollar drifted lower ahead of the US open on Wednesday as EUR/USD drifted up to the 1.3560 area on concerns over the US debt talks. As far as data is concerned, there was a decline in the NAHB housing index to 55 from 58 previously, the lowest reading since June.

As US debt-ceiling negotiations resumed on Wednesday, there was a fresh mood of optimism even with Congress and the media battling to understand procedural complexities. Overall, there were expectations that the Senate would finalise a compromise bill and that the House would look to expedite a deal despite persistent opposition from the hard-line Republican faction.

This optimism triggered fresh dollar demand as USD/JPY moved to highs above 98.80 and EUR/USD dipped to near 1.3500. Markets were still on alert for further setbacks before any deal could be concluded as conditions remained very choppy.

The headline UK claimant count data was stronger than expected with the biggest monthly decline for over six years with a second successive monthly decline of over 40,000. There had been some speculation that the unemployment rate would decline again, but this held at 7.7% for the month.

Sterling spiked higher following the data, but there was also some disappointment over the rate of earnings growth at 0.7% which implies weak purchasing power. GBP/USD hit selling pressure above 1.6050 and dipped back below 1.6000 as the dollar recovered ground.

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