THE TAKEAWAY: The US Dollar rally has stalled as traders look toward Washington, DC for direction cues amid last-minute negotiations to avoid the “fiscal cliff”.
As the turn of the calendar year approaches, the financial markets remain focused on how US policymakers will avoid the ‘fiscal cliff’, which is a series of tax increases and government spending cuts due to come into effect on the first day of 2013. The US Dollar strengthened last week leading into the Christmas holiday as haven flows buoyed the currency amid lingering deadlock. Prices now appear to be hovering at key technical resistance.
Negotiations are still ongoing at the open of this trading week but an agreement outlining (at least) how to reduce the impact of the “fiscal cliff” has not been reached. A bit of supportive news-flow emerged Sunday as Republicans dropped a key demand to link growth in Social Security pay-outs to “chained” CPI, which would decrease spending by slowing the pace of inflation adjustment. However, critical sticking points including the income threshold for tax hikes and the hefty $100 billion “sequester” spending reduction remain.
Although time is running out, it is still possible that the two sides could come to a watered-down, temporary agreement averting an immediate austerity shock and paving the way for more substantive work in the months ahead. Indeed, the political impact of compromise may be muted considering the outgoing Congress would leave the truly hard decisions to a new set of legislators to be sworn in on January 3. It appears overwhelmingly likely however that with the clock ticking down to the last hours of the year, a “grand bargain” deal that addresses the core issues of US fiscal health will not materialize in 2012.