Mixed messages from the US send ripples through Forex trading

Last week the spotlight was on China. This week, conflicting messages from the US are having a major impact on forex trading, with an aggressive push on the dollar belying an underlying concern that the impasse on the US budget could send forex traders scuttling for cover. The dollar pushed upwards bolstered by a safe-haven demand on stocks following a lacklustre jobs report, but that bullish response could be very short lived. Previously, the US had been considered the safe bet as PMI readings across the world conveniently side-stepped the superpower.

However, there is a ‘but’ in all this. The result was that hopes were pinned on the US recovery carrying the rest of the world forward into a more tranquil trading period, despite China’s and the Eurozone’s woes. That march forward has now effectively stumbled, as the deadlock over the US national debt has left President Obama struggling to get support for a budget package that would have cut the national debt by $4tn. The result? A superpower that risks defaulting on its debts in just three weeks, when the current federal budget runs out. That could make Greece look like a financial hiccup in comparison.

Elsewhere, China’s woes continue, with currency trading in the Far East impacted by a report that put the country’s inflation levels at 6.4% during June, a rise from 5.5% in May. Fears are now that Beijing will now increase its efforts to cool the economy, putting the brakes on imports in particular. Signs are already emerging that China is tightening its fiscal belt, and with the Tiger now effectively declawed the repercussions for forex markets could be considerable.

In Europe, Italy is the latest country to be considered a financial risk, as bitter political infighting between Prime Minister Berlusconi and Finance Minister Tremonti threatens to scupper a 40billion Euro deficit reduction plan. This all adds to the Euro’s current crisis, and the forex currency trading markets reacted in typical fashion, bailing as quickly as possible out of the Euro and into the dollar. Whether that was a wise move considering the reports coming out of the States remains to be seen. Italy is the third largest economy in the Eurozone, so any financial difficulties could effectively destabilise the entire region’s currency trading. With disappointing PMI reports hinting at a global slowdown in the second half of this year, this week has not been a good one for forex traders of a nervous disposition.

 

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