The relief rally which followed the news that the U.S. government managed to avert a debt default was short-lived as investors now consider the economic tally of the damages sustained with the 2-week long shut down of the federal government. Adding to concerns is that the whole situation might replay within the next quarter since the deal that was made between the political parties only allowed for a temporary increase of the government’s federal spending limit.
As reported at 11:45 a.m. (JST) in Tokyo, the USD/JPY pair was steadying at 98.04 Japanese Yen after a major selloff in the overnight hours which resulted in a 0.8% decline in value, the largest single-day’s percentile drop in more than a month. The EUR/USD also had huge momentum swings, with the Euro gaining more than 1% on the greenback which is now trading close to an 8-month trough at $1.3670. Similarly, the U.S. Dollar Index hit an 8-month low during yesterday’s session, to trade at 79.613 .DXY.
Outlook to Non-Farms and Fed Policy Decision
Investors’ expectations that the Fed would begin to end its monetary policy are being challenged given the economic repercussions of the government closure. Analysts believe that 4th quarter growth could fall by as much as 0.4% as a result, and that may result in the Fed postponing tapering farther into 2014. Since one of the Fed’s mandates is to ensure full employment, markets will watch next Tuesday’s release of non-farms payroll data; an upside surprise could once again change market sentiment.