The Pound to US Dollar exchange rate (GBP/USD) rallied by around 0.35 cents, reaching a fresh 9-month high of 1.6246, earlier this morning when it was announced that the US government was shutting down because of a political impasse between Democrats and Republicans.
Opposing political forces failed to agree a budget for the 2014 fiscal year, which starts today October 1st, as Republicans in the House of Representatives continued to reject proposals from the Democratically-led Senate to ratify a short-term spending bill involving public healthcare legislation.
Today’s shutdown is the first since 1996, when Federal agencies were closed for 21 days. It has been estimated that a closure of 14 days would reduce US GDP by around -0.3%, whilst a 28 day shutdown could impact Gross Domestic Product by as much as -1.3%. With this in mind traders were keen to exit US Dollar positions and this benefitted Sterling
The shutdown of non-essential government facilities involves the furloughing of around 700,000 employees without pay, tourist destinations such as the Grand Canyon, Statue of Liberty and Yellowstone National Park will be forced to cease operation, as will publicly run museums and art galleries. Other factors such as rubbish collection in the nation’s capital and gun trading will also be affected, but perhaps the biggest impact on GBP/USD will be how the shutdown influences the Federal Reserve.
With Friday’s highly anticipated US Non-Farm Payrolls report unlikely to be released during the cessation period, the Fed is likely to delay the tapering of its $85 billion a month bond-buying scheme until the health of the US economy is more transparent. When the world’s most powerful Central Bank shocked markets in September by opting not to reduce the pace of its asset purchasing scheme, the Fed noted that it would only begin the tightening process when economic conditions were seen to have improved considerably.
As Societe Generale point out, the lack of data could lead to the decision being delayed:
“A government shutdown could interrupt the flow of economic data. At such a critical time, when the Fed has made clear that any decision on tapering will be data dependent, that means no data, no decision”.
Apart from the negative image that the debacle portrays of America’s ability to govern itself, the shutdown, if lasting for an extended period, could also wreak havoc with congress’ attempts to raise the US debt ceiling in the middle of October. The current borrowing limit, which stands at $16.7 trillion, is due to be hit on October 17th, potentially causing the US government to default on its debt. This would send huge shockwaves across financial markets and impact demand for the US Dollar as its safe haven status would be eroded.
The ‘Aussie’ Dollar gained around 1.25 cents against Sterling earlier this morning, bringing GBP/AUD down to 1.7275 as the Reserve Bank of Australia opted to maintain its current benchmark interest rate of 2.50%.
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