Political gridlock in Washington ahead of deadline continues to dominate financial markets. Failure by US lawmakers to extend the country’s borrowing limit is widely unexpected; therefore, should politicians not find a solution by October 17, currency markets would likely be turned upside down by panic-driven trading.

The US dollar rose with the Republicans reopening debt talks with US President Barack Obama while minutes from the Federal Reserve’s September policy meeting increase the likelihood of a dollar-positive stimulus taper coming soon.

Washington-permitting, markets will also zoom in on critical data from the UK which could revive the pound’s fortunes after the currency slumped to a five-week low against the euro. Britain will publish its latest figures on unemployment which will give traders more clarity on UK interest rate expectation.

The euro could lead currencies on the more risky end of the scale sharply lower this week the longer US lawmakers continue to grapple over a fiscal solution. Although, results from eurozone economic data and ministers’ meetings could support the currency by highlighting the area’s economic and fiscal progress this year.

Sterling

The sterling has struggled over the past two weeks after soaring to multi-month highs amid concerns that Britain’s economic recovery still remains bumpy. Data showed that UK manufacturing and industrial output in August badly missed expectations. However, sterling may start to put together a recovery and move back towards recent highs in front of upcoming data UK data on inflation and unemployment.

US dollar

The US dollar rose to a two-week trade-weighted high with the currency’s near-term fate still in the hands of US lawmakers ahead of debt ceiling deadline. The announcement of Janet Yellen as the next Federal Reserve chair has been largely overlooked by markets as the Republicans and Democrats continue to debate an extension that would avert a US Government default. October 17 looms dangerously, and failure by politicians to put together any kind of fiscal solution could send financial markets into panic and drive currency traders towards safe haven assets.

Euro

Last week, the euro fell from near eight-month highs against the US dollar as signs of progress in Washington over the budget crisis spurred investors to pare back on anti-dollar bets. Movements for the single currency were generally muted though with its downside supported by data on German factory output which topped forecasts in August.

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