The markets are looking quite today with no new clues of the US political crisis and no US labor report to be released in the first Friday of the month to contain the market sentiment.
While evaluation the impact of the current US partial government shutdown on the economy is what containing the pundits specially as it can be extended or turning into total shutdown with no political compromise yet to save the government from the default scenarios.
We have seen Obama in the first meeting following this shutdown with the Congress leaders in the white house this week coming sending a message that it is still soon to have a solution
He has told them that he is to start to negotiate with them again only after their agreement to pass the financing needed to reopen the government and also after their approval to make the essential needed increase of the debt limit without add-ons.
So, it looked to the markets that there can be further difficulties to come and the road of the government turning back is looking rough as the other side is hard to give in by these words which give to Obama who is in power more than they give to the republicans who wait for a new represented plan from Obama contains alternative can be passed as they do not want to accept his health care plan to start without the one year delay they want and in the same time they are not to look for a solution to his government which has been shutdown.
While the market can start to react to the unexpected weak economic figure nervously as they have done yesterday following the release of US ISM non-manufacturing index of September came at 54.4 while the market was waiting for 57.4 from 58.6 in August has been its highest value of expansion above 50 since Feb 2011 as the possibility of having weaker economic performance in US can lead to keeping of the Fed’s QE unchanged for longer time than what has been priced following the recent Fed’s meeting specially with the current unknown end of the debt ceiling problem which can dampen the Fed’s stimulating efforts and looked to be appreciated by the Fed when it decided last month to keep its monthly scale of buying unchanged while the tame inflation in US can guarantee the existing of these stimulating efforts which weigh down on the greenback as what has been mentioned in previous analyses.
While the single currency is still having the ability to keep its recent gains versus the greenback on the Italian PM Letta winning of confidence vote in parliament while the ECB meeting this week came with no major change
It has decided to maintain as expected the refinancing rate at its record low at 0.5% for the fifth month holding also the deposit rate at zero and the marginal lending rate at 1%.
The ECB has maintained also its forward guidance saying that it is to keep the rates at or below the current level for an extended period of time as it has started to do following its monetary meetings since last July to put pressure on the yields after the expectations of having a cut of the Fed’s QE could contribute in pushing up the yields in EU again.
Draghi has referred to occurred discussions during yesterday meeting about cutting the interest rate but at the end the members have chosen to keep it unchanged as the economy is giving improving signs and he has mentioned that despite the high unemployment rate which is still standing around 12% the Economic confidence as measured by the European Commission rose for the fifth consecutive month and a gauge of factory output rose for the third month in row.
So, there was no change from the ECB which preferred to wait and see whether or not it is to have what can make it necessary to take another easing step to support the economy while the inflation pressure is still looking subdued as what has been seen from the falling of EU HICP from 1.3% in August to 1.1% yearly in the recent released flash reading of September to be below 1.2% rate of last April when it has managed on to move cutting the interest rate to 0.5% from 0.75% in the meeting of 2nd of last May.
God Willing, the single currency can meet now versus the greenback in the case of rising further after ending consolidation around 1.35 level higher resisting level at 1.3709 which is still the top of this year until now and it has been reached in the beginning of last February and its breaking can lead to another resistance at 1.3866 before the psychological level at 1.40 while getting back down can be met by 1.35 psychological support before its pervious support at 1.3461 which can be followed by 1.3324 before meeting other supporting levels at 1.3229, 1.3104 before 1.30 psychological level which can be followed by 1.2865, 1.2808 before the area between 1.2754 to 1.2736 which could prop up the pair two times this year.
Kind Regards
FX Market Strategist
Walid Salah El Din
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