Forex Analysis: Dollar to Fall if US Officals Reach Fiscal Cliff Deal

The US Dollar is likely to weaken against most of its top counterparts if US lawmakers manage to secure a deal avoiding the fast-approaching “fiscal cliff”.

Talking Points

• US Dollar to Decline if US Policymakers Secure “Fiscal Cliff” Accord

• Japanese Yen Sold on Speculation Abe Government to Debase Currency

The spotlight remains on Washington, DC as financial markets return from the Christmas holiday, where US policymakers have a mere five days left to deliver a deal avoiding the so-called “fiscal cliff”, a set of tax hikes and government spending cuts due to trigger at the turn of the year. The Congressional Budget Office (CBO) projects the jolt of austerity will tip the US back into recession.

The markets’ baseline scenario appears to call for a last-minute compromise that avoids an immediate fiscal shock but falls short of setting US public finances on a sustainable long-term path. The emergence of a loose framework for negotiating a “grand bargain” in the future also seems to be baked in.

While a watered-down accord is undeniably better for market-wide risk appetite than none at all, follow-through is likely to be limited to a short-term advance reflecting the dissipation of uncertainty. Indeed, with investors’ forecasts validated, the impetus for speculation evaporates.

For forex markets, a fiscal cliff deal is likely to broadly weigh on the US Dollar amid ebbing safe-haven demand for the benchmark currency. A lone exception may be found in the greenback’s pairing with the Yen, where the focus remains on domestic policy. Indeed, the Japanese unit hit a 20-month low against its top counterparts overnight amid speculation incoming Prime Minister Shinzo Abe will push to sharply weaken the currency in a bid to beat deflation.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
1:30	CNY	Industrial Profits YTD (YoY) (NOV)	3.0%	-	0.5%
4:00	JPY	Vehicle Production (YoY) (NOV)	-8.4%	-	-12.4%
5:00	JPY	Housing Starts (YoY) (NOV)	10.3%	10.7%	25.2%
5:00	JPY	Construction Orders (YoY) (NOV)	-2.1%		-13.8%
5:00	JPY	Annualized Housing Starts (NOV)	0.907M	0.911M	0.978M

Euro Session: What to Expect

GMT	CCY	EVENT	EXP/ACT	PREV	IMPACT
7:00	CHF	UBS Consumption Indicator (NOV)	1.23 (A)	1.30	Low
7:45	EUR	French Consumer Confidence Indicator (DEC)	86 (A)	84	Low
7:45	EUR	French Producer Prices (NOV) (MoM)	-0.5% (A)	0.5%	Low
7:45	EUR	French Producer Prices (NOV) (YoY)	1.9% (A)	2.8%	Low
9:00	EUR	Italian Business Confidence (DEC)	88.8	88.5	Low
9:00	EUR	Italian Economic Sentiment (DEC)	-	76.4	Low
9:30	GBP	BBA Loans for House Purchase (NOV)	34500	33039	Medium

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.3178	1.3300
GBPUSD	1.6108	1.6170

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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