Pound Dollar Exchange Rate (GBP USD) Dips Despite US 'Fiscal Cliff' Debt Deal

Published: Thursday, 3 January 2013 09:00 BST - Written by Frank Davies

STORY LINK Pound Dollar Exchange Rate (GBP USD) Dips Despite US 'Fiscal Cliff' Debt Deal

Yesterday’s session in the currency markets saw a return to more usual levels of volume for the first time since the week prior to Christmas. It also brought some significant price action as institutional investors scrambled to adjust their positions following the announcement of an agreement between warring Democrat and Republican factions in the US on how to avoid a damaging trip over the ‘Fiscal Cliff’.

America’s debt agreement was announced late on Tuesday and the market’s initial response was one of unmitigated relief. This sent global stock markets spiralling, (London’s FTSE 100 ended yesterday up by a whopping 2.20%, while New York’s benchmark Dow Jones index registered gains of some 2.35% on the session). The immediate effect of the news on the safe haven US Dollar was highly negative – the Greenback leaked support in early trading yesterday, sending the Pound Dollar exchange rate (currency : GBP USD) to a new 16-month high at close to 1.6400.

Yesterday afternoon’s stronger than anticipated ISM Manufacturing survey for December showed that America’s factory output returned to growth last month. Ordinarily, such a print, in combination with the positive from the US ‘Fiscal Cliff’ talks, would have sent GBP USD spiralling. It was a surprise then, when Cable ended the day lodged in the lower part of the 1.6200s once more.

The move in favour of the ‘Buck’ during the latter part of yesterday’s session suggests that market participants remain far from convinced by the patched-up budget deal in the States. On closer inspection, the agreement addresses only one third of the US’s book-balancing problems. While it is certainly a positive that hefty tax hikes on America’s middle income earners have been averted, US lawmakers will still need to negotiate a pact on spending cuts and raising America’s debt ceiling before the end of February. Failure to reach an accord on these two key areas within this timescale will mean that the world’s largest economy will tumble over the ‘Fiscal Cliff’. It appears possible that events in the US congress earlier this week have simply delayed the inevitable.

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