Obama downloads the Wonga app ... just in case!

Week Commencing Monday 31st December 2012


Overriding Market Themes


US Congressional leaders have just today to stop steep tax rises and spending cuts from coming into effect across the United States, otherwise known as the “Fiscal Cliff”. Neither Republicans nor Democrats can come to an agreement, with Republicans seeking to protect generous tax breaks for the rich, whilst Democrats continue to look to reduce spending on areas such as defence. If no agreement is reached by the end of play on Monday, senators are expected to be given the chance to vote on a fall back plan proposed by President Obama. That would renew tax cuts on earnings under $250,000 and extend unemployment benefits, but does not address the spending cuts. Commentators say that even if a deal is reached, it will do little to reduce the original problem of the deficit and the government debt limit, raising the prospect of further political infighting early in the New Year.

 

It is important to note also that, even if the country falls off the metaphorical cliff, it does not automatically mean a new wave of global recessions will be upon us. The tax rises and spending cuts authorised by the Bush government are scaled and will not all take effect on the 1st January. It is also possible that any cuts in spending or tax rises could be reversed in the senate in the first months of the year, thereby limiting the effects they would bring. All in all the situation remains very fluid, but the political tension in Washington is a sign that the Obama administration has its work cut out.

 

The CBI has stated that the UK needs to keep its privileged place within the European Union to push for a freer trade for its businesses. The lobby group says the UK should use the EU to help rebalance the economy towards more export growth and create new and more favourable trade deals with the single market. It confirms that, although the EU and US have relatively open economies, there are examples of obstacles to trade, which would only become more apparent if the UK were to leave the Union. Certainly, any UK departure from the European Union would have devastating consequences for British business and perhaps our reputation around the world. Indeed, many believe that Europe acts as a “power multiplier” to the UK as its free market mentality attracts international business to focus their European operations in the country.  

GBP This Week


Manufacturing PMI kicks off Sterling’s week, with a 49.2 figure widely expected against a previous 49.1 posted last month, indicating a very slight improvement in this sector as we approach the new year. Then, Construction PMI on Thursday is also expected to improve slightly from 49.3 to 49.6, hopefully indicating the sector is recovering from a terrible year. Finally, Services PMI should post in at 50.4 against 50.2 last month, indicating once again that Services continue to grow at a faster pace than its peers.

USD This Week


This should be a busy week for the Dollar, although all of these releases will be overshadowed by the Fiscal Cliff negotiations. ISM Manufacturing starts the ball rolling on Wednesday, with an expansion from 49.5 to 50.2 projected by many traders. Thursday sees US Unemployment Claims and Non-Farm’s, which should show a slight reduction in the level of unemployment. Finally, Friday sees the release of the Unemployment Rate, which should remain at 7.7%. 

EUR This Week


A very quiet week for the Euro with various unemployment and PMI figures set to be released in the second half. None of these releases should have a dramatic effect on either GBP/EUR or EUR/USD, so expect a quiet week on both pairs with them set to follow the trend. 

In Other News


It’s the dawn of a new year, and here is to a good one! It seems that we continue to have many hurdles on the path and I am sure that the journey will not be smooth, but hopefully this will be the year that the UK stabilises and returns to growth. 

Comments


Let us know your thoughts or comment's on today's market report. Email the author at andrew.jolliffe@nucurrencies.com.

 

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