EUR/USD (1.4390) The dollar rallied briefly when the US President announced that an agreement had been reached on a provisional budget deal. Democrats got the debt ceiling raised by $2,400bn in exchange for $2,800bn in spending cuts, $1,000bn of which would be immediate. While saving the government from the prospect of default, the deficit-reduction plan will probably not be aggressive enough to avoid a credit-rating downgrade. S&P stated in July that it would take at least a 10-year, $4,000bn plan to avoid losing Washington’s AAA status. However, as we argued already on Friday, the consequences for the bond market should be limited even in this case.
Another source of uncertainty was removed from the market with the release of Friday’s GDP numbers, although only by showing that the growth situation in the US was worse than most analysts had expected. The US economy grew by only 1.3 percent in Q2, with the Q4 ‘10 number being revised down from 1.9 percent to 0.4 percent. Given the spending cuts suggested by Mr Obama’s budget compromise, the US economy could initially be weakened even further. Our former strategy was unseated at the Friday low; however, the risk/reward considerations enable us to re-embark on an immediate euro-bullish strategy with a target at 1.4700 and a risk limit at 1.4330. Crossing the 1.4560 hurdle would give the EUR/USD additional upside momentum.
Market Bias Index
The US budget compromise didn’t improve the US dollar all that much – it is perceived, along with the euro, as the most undervalued currency.
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Deutsche Bank
Fixed Income Research – Global