The U.S. Government failed to raise the debt ceiling and a shutdown is to follow. The following article examines market reaction and possible scenarios. What’s the trade at Market open?
Last shutdown goes back to 1st October 2013. Back then USD was falling too before staging a relief rally. There was a growing consensus back then when Obama was president, that a shutdown was likely. As a matter of fact Dow Jones Industrial started falling several days ahead and extended its slide until half way through the 16 day shutdown.
This time the shutdown comes as a surprise and a swift, temporary, re-pricing is likely. We expect indices to nose dive %1-2. Eyeing USDJPY sub 110.50 and extending to 109 area.
EURUSD is a bit tricky. We are awaiting German coalition talks to resume on Sunday and neutral to hawkish comments from ECB meeting on Thursday. If they materialise our call is for price to move rapidly to 1.25.
GBPUSD got a boost from French president Macron. Nodding at favourable trade conditions for Britain followed by Spain and Netherland. Who are advocating for a soft Brexit. We believe recent developments coupled with USD weakness will catapult price to 1.4012. Where price will hit a long-term supply line.
Expect USD to spike lower and snap back(like the NFP release effect) before making a definitive move lower. Risk to the trade are constructive comments from U.S. officials but as the fallout is fresh. It’s reasonable to believe that both Republicans and Democrats will continue to blame each other and hold their ground until demands are met or give in and compromise. However it’s a political risks and not an economic one. The effects are temporary and subject to reversals.
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