GBP USD, GBP AUD And GBP NZD Exchange Rates Depend On Positive Outcome In US Fiscal Cliff Talks

Published: Wednesday, 19 December 2012 09:00 BST - Written by Toni Johnson

STORY LINK GBP USD, GBP AUD And GBP NZD Exchange Rates Depend On Positive Outcome In US Fiscal Cliff Talks

Sentiment towards the US Dollar ebbed and flowed during yesterday’s session in the currency markets in time with investors’ feelings on the likelihood of a timely resolution to the long-running discussions between Republican and Democrat lawmakers in the US. A failure to reach a compromise on the world’s leading economy’s budget would send the US tumbling over a potentially disastrous ‘Fiscal Cliff’ comprising severe tax hikes and governmental spending cuts. The probable outcome of such an event would see the US economy plunge into a deep depression from which it would take many years to emerge.

The stakes could hardly be higher, so Monday’s news that Republican and Democrat factions had emerged from discussions in an ‘optimistic’ frame of mind caused an improvement in global appetite for risk which triggered a move against the safe-haven Greenback. This saw the GBP USD exchange rate trade above the 1.6200 for a fair portion of Monday. Market whispers suggest that Friday’s talks had seen Republican leader of the house, John Boehner, offer to raise the level of income tax on US citizens earning in excess of $1,000,000 per year – a move which, up to that point, he had vehemently resisted. The news raised hopes of a swift agreement.

However, a statement yesterday afternoon by Boehner’s representative Brendan Buck which described the Democrat’s rejection of Friday’s proposal as defying ‘common sense’, caused a renewed attack of the jitters for investors with US-based interests. This caused GBP USD to pull back from its daily high during the latter part of the session.

The short-to-medium term future of the US Dollar remains dependent on a viable debt agreement being reached in the US. A failure to agree on an accord, which remains a distinct possibility given the bitterness which many Republicans feel towards their Democrat counterparts following President Obama’s crushing defeat of their hopeful Mitt Romney in last month’s presidential election, would be likely to trigger strong support for the Buck, sending the GBP USD exchange rate sharply lower.

Such an outcome would cause global appetite for risk to evaporate from the market in an instant, sending the GBP AUD and GBP NZD exchange rates rapidly up towards 1.6000 and 2.0000 respectively.

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