Stalling US Fiscal Cliff Talks Could Send GBP AUD And GBP NZD Exchange Rates Higher

Published: Friday, 21 December 2012 09:00 BST - Written by Frank Davies

STORY LINK Stalling US Fiscal Cliff Talks Could Send GBP AUD And GBP NZD Exchange Rates Higher

Today marks the final day of the ‘long count’ calendar used by the ancient Mayan civilisation, leading doom-mongers across the globe to prophesy the end of the world as we know it. While movements in Asia’s equities markets during the overnight session did little to lend this theory credence, (Hong Kong lost a little ground, while Tokyo traded slightly up), the ongoing debt talks in the US are providing cause for genuine concern.

Last night’s news from the States was indeed of a potentially apocalyptic tone; Republican lawmakers announced that they were cancelling a vote in the nation’s lower house on the so-called ‘Plan B’ route which would steer the nation’s economy away from the ‘Fiscal Cliff’. The proposal, which emanated from last Friday’s offer by Republican house leader John Boehner to increase income tax on US citizens earning over the $1m per anum mark, did not sit well with the more conservative element of his party. Whilst the clock may not be ticking down on the end of the world just yet, the dangerous game of brinkmanship in which warring Democrat and Republican factions are currently indulging has the potential to cause a drastic diminution of global living standards in the medium term.

For this reason, appetite for risk amongst institutional investors may ease during today’s session, as market participants baton down the hatches and shift their funds into safe haven assets ahead of next week’s Christmas go-slow in the markets. Such a scenario would see strong support for the US Dollar, which continues to be the world’s favourite port in an economic storm. For this reason, the Pound may lose ground against the Greenback on the day, sending the GBP USD exchange rate back down towards the psychologically key 1.6000 level. Conversely, the risk-sensitive Australian and New Zealand Dollars could leak support, sending GBP AUD and GBP NZD higher.

Elsewhere, it would be a surprise if this morning’s finalised version of the UK’s Q3 GDP data showed at anything other than the previous estimates of a quarterly print of -0.1%. However, with the Bank of England having speculated earlier this week that the British economy will contract in Q4, a downward revision to today’s Q3 print could trigger a bout of sharp broad Sterling weakness.

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