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By Gaurav Kashyap, Alpari ME DMCC
US government waits on debt ceiling decision
The overall unemployment rate increased to 9.2% with hiring in the private sector increasing 57K (v 120K exp / 73K prev). Immediately following the news, the US Dollar initially sold off, perhaps on speculation & rumours that the latest jobs report would force the Fed into additional QE measures with a hope of stimulating a stumbling economy. However rumours were all they were, and Friday's close saw the US Dollar pare almost all of its losses on the day to close the week on a strong note.
The timing of the jobs report couldn't have been any worse as the story of the US Government fast approaching its debt ceiling of $14.3 trillion gained momentum. By already suspending two federal pension funds, the US Government has staved off a default scenario until at least August 2nd and will hope for a quick resolution between Democrats and Republicans regarding raising the ceiling (Congress has raised the debt ceiling 12 times since 1995).
President Obama met with congressional leaders on Sunday night to push his plans for a $4 trillion deal towards reducing debt, through a combination of revenue raisers (raising taxes) and aggressive spending cuts towards Medicare and Medicaid.
However with the Republican Party, led by John Boehner, staunchly against revenue raisers and aiming for a more conservative drawback of approximately $2.4 trillion over the next ten years, there was no conclusion and the deadlock saw risk markets selloff as the US Dollar pushed aggressively higher in trading during Monday's opening. With the scenario of the US falling into a default scenario largely unlikely, a solution should be thrashed out by July 22nd. We can expect to see risk sentiments capped in the lead up to this announcement.
ECB, BoE, RBA announce rate decisions
Last week also saw the rate decisions from the RBA, ECB and BoE. With the BoE's decision largely a non-event (as expected, rates were held at 0.50% and the asset purchase plan at GBP200bn) the markets turned their focus to Trichet's press conference and as expected, the ECB President hiked rates 25 basis points to a revised 1.50%.
It was the second hike of its kind since April and saw the Euro crosses getting a temporary boost before Friday's US data saw the Euro pare its earlier gains. In the other rate decision of the week, the Reserve Bank of Australia held rates unchanged at 4.75% and the dovish comments following the announcement saw the AUDUSD head toward its weekly low of 1.0663 (the 50 day MA) where it found very good support. Compounding to the downsides in AUDUSD was data from China this past Saturday which showed inflation increased to 6.4% from 5.5% from a month earlier - the largest increase in more than a year.
Wait for UK inflationary data
Looking at the trading week ahead, on Tuesday we await the release of inflationary data & retail data from the UK, due out at 0830 GMT and this will be followed by the FOMC meeting minutes which will be released at 1800. Tuesday's data from the UK will provide an interesting trading opportunity for GBP traders.
Technically, GBPUSD looks very vulnerable for more downsides - with trading opening on Monday, the pair has already broken through the 50 week MA and an extended move below these levels at 1.5970 could see the pair move towards the 100 week MA of 1.5820 levels. However an improved reading on the retail front followed by a good UK jobs report on Wednesday could see further downsides halted. The Eurozone will also be releasing inflationary data on Thursday with the US releasing retail sales and inflation data on Thursday and Friday respectively.
Staff
