DailyFX

Forex: Dollar Doesn’t Have Same US Debt Ceiling Optimism as S&P 500

John Kicklighter

Talking Points:

  • Dollar Doesn’t Have Same US Debt Ceiling Optimism as S&P 500

  • British Pound Rate Hawks Look to Inflation Data to Fortify BoE Fight

  • Euro Steady, Bonds Gain as Eurogroup Discusses Future for Rescues

Dollar Doesn’t Have Same US Debt Ceiling Optimism as S&P 500

US politicians are proving more stubborn than optimists have accounted for. The dollar’s mild bounce and the biggest two-day S&P 500 rally since the beginning of the year into this past weekend was founded on confidence that a weekend deal would be struck to end the debt ceiling standoff. Yet, the faceoff lasted the weekend, and traders’ surprise was clear with a morning tumble from both the benchmark currency and broad equity market measure. Despite that early correction, though, confidence in a deal seems unflappable. Whether faith that officials wouldn’t jeopardize a full-scale crisis or simple opportunism to front-run a ‘relief’ rally; the market lean is clear.

Looking to the October 17 (Thursday) debt ceiling date established by Treasury Secretary Jack Lew and taking into the implications of even a brief sortie into default territory – it is important we weigh the risks of trading against this ‘fat tail’ (low probability scenario). Tuesday, the Senate will take back up the debate to hammer out a bill that it can hand back to the House to weigh in on. The majority of politicians voicing optimism is growing, so forcing through a three month delay may be possible. Yet, does the S&P 500 rally on that news after its recent run up?

British Pound Rate Hawks Look to Inflation Data to Fortify BoE Fight

Some of the sterling’s impressive gains over the past three months have been bled off; however, this mild retracement far from rebalances the currency’s bearings. At the center of this fundamental pricing consideration are the market’s expectations for higher rates. According to the Bank of England’s (BoE) forward guidance, the central bank plans on holding the benchmark rate at its extremely low level until 2016. Yet, the swaps curve is still pricing in the first hike well before that time frame. This is a discrepancy that presents serious contention for the pound. If there is too much optimism, the currency has considerable room to retrace. The upcoming round of inflation data will help to shape expectations. There would likely be a greater reaction to a tame price reading as speculators are more compliant to data shifts.

Euro Steady, Bonds Gain as Eurogroup Discusses Future for Rescues

Eurozone Finance Ministers met to discuss the economy, banking union and rescue programs Monday. In the upcoming session, officials from the broader European Union will convene on the same. The comments to come out the first round offered an interesting assessment of the region’s health. According to Eurogroup President Joroen Dijsselbloem, Ireland and Spain are on pace to exit from their respective support programs. That is ambitious considering the financial liabilities both countries’ economies and banking sectors float. A less overtly optimistic tone surrounded Greece’s evaluation. Dijsselbloem remarked that there was no support for a further haircut for the long-troubled country and further suggested the country’s future support system will be revisited at the December meeting.

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