Stock markets surged and the US dollar slipped on reports that US lawmakers are now working through a proposal that would temporarily increase the US Government’s borrowing limit and remove the threat of a sovereign default.

Currency traders will remain glued to talks between US President Barack Obama and the Republicans. No deal could weigh heavily on markets while an agreement will then force investors to position themselves for a flood of US economic data releases that have been held back, including vital figures on non-farm payroll.

Suffering losses, the British pound found support after the Bank of England announced no changes to UK monetary policy this month. Despite some indifferent data in recent sessions, the sterling could advance in the days ahead before critical UK unemployment reports.

The euro gained and has opened positively on news of negotiations in Washington which boosted risk appetite.

Sterling

The sterling fell to a three-week bottom against the US dollar before climbing to a two-day high after the Bank of England which, as expected, left its 0.5 per cent bank rate and £375 billion asset purchases programme unchanged. The pound has struggled a week amid concerns that Britain’s economic recovery remains bumpy. Data showed that UK manufacturing and industrial output in August badly missed expectations.

US Dollar

The greenback initially rose on news that Washington is now working towards a temporary increase in the US Government’s debt ceiling for a period of about six weeks. Although nothing has been agreed or rejected, the move took the US dollar to a three-week high against sterling and kept the US currency near two-week highs against the euro. However, the greenback later fell as investors jumped back into equities which rose strongly, as well as more risky currencies.

Euro

The euro has opened positively after early negotiations to lift the US debt ceiling in order to avoid a government default lifted market sentiment and risk taking. The euro had hovered near 10-day lows against the US dollar as European Central Bank president Mario Draghi said that recovery in eurozone economy remains uneven and fragile. Draghi also hinted that if financial market volatility returned, the ECB would consider cutting its main interest rate to a new record low.

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