Currency market volatility could step up another gear in the days ahead should US President Barack Obama fail to clinch another last-minute deal before Sequester deadline.
US budget concerns pushed the safe-haven US dollar to new six-month highs against a basket of currencies. Further gains are likely after disappointing US economic growth figures underlined the risks of the Sequester, both for the US and world economy. Investors globally are already growing more and more cautious with political deadlock in Italy threatening to revive the eurozone debt crisis.
Italian worries continued to weigh on the euro and the single currency could face another difficult trading session. The latest eurozone unemployment and inflation figures are expected to point in the direction of another interest rate-cut this year before the European Central Bank meeting.
Sterling
Doubts about eurozone government debt and Japanese monetary policy continued to play in favour of the British pound while sterling also gained before a report that is expected to show that growth in Britain’s manufacturing sector improved. Sterling put more distance between itself and earlier 16-month lows against the euro and may hold those gains should improved UK manufacturing data temper anxiety about the British economy.
US dollar
The US dollar jumped to fresh six-month highs against a basket of currencies and may continue its march higher as the threat of automatic US budget cuts weighs on market sentiment and the US dollar’s more risky rivals. Unless President Barack Obama can secure another last-minute deal in Washington, automatic across-the-board spending cuts worth $85 billion, known as the Sequester, will take effect. Although the risk of the fiscal cliff was prevented, the prospect of a potential “fiscal hill” could prove damaging for a somewhat delicate US economic recovery, and also provide a significant blow for confidence in the global economy.
Euro
The euro could be in danger of a decline following data that are likely to show troubles in the eurozone economy widening as inflation falls, giving the European Central Bank more reason and room to cut interest rates later this year. Revisions to a manufacturing PMI survey will probably confirm the industry did shrink by more than expected in February. Separate data are predicted to show unemployment across the 17-member bloc climbed to a record 11.8 per cent in January.