Weekly Eurozone FX – Fiscal impasse paralyses EUR/USD

by: Georgette Boele

The US fiscal impasse continues to dominate the attention of financial markets. Currency markets have mainly been paralysed by this, reflected in relative small movements, with currencies lacking a clear direction. The announcement that President Obama named Yellen to become the next Chairman, replacing Bernanke, and hopes of a short-term debt ceiling solution have improved investor sentiment. As a result, the JPY has partially given up its recent gains versus the USD and EUR. EUR/USD has traded between 1.35-1.36 though. In case that market sentiment deteriorates again, the JPY should receive support and the USD will be on the defensive, because the US is at the epicenter of the market uncertainty. As soon as US politicians find a way out of the impasse, raise the debt ceiling and re-open the government, then the USD should rally, also against the EUR, while we think US economic fundamentals are positive. We therefore stick to our bullish view of the outlook for the USD.

131014 - Eurozone FX_EUR_USD Expectations