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3 US Political Decisions with Big FX Impact

3 US Political Decisions with Big FX Impact

Kathy Lien, Technical Strategist

Wednesday’s Fed policy decision is the biggest one of all, but ongoing debate regarding the next Fed Chairman and a looming deadline for the debt ceiling this month are weighing on the US dollar, too.

The US dollar (USD) continued to trade lower against all major currencies this morning with the exception of the Japanese yen (JPY). While the lack of big moves in the FX market suggests that traders are just biding their time ahead of tomorrow’s Federal Open Market Committee (FOMC) meeting, extension in such pairs as AUDUSD and NZDUSD reflects hesitation about holding dollars.

According to positioning data, the market is still very long dollars, and the risk of disappointment this week is high. Unfortunately, the dialogue out of Washington is not helping the greenback, either.

Controversy Regarding the Next Fed President?

Not only is the Fed's looming policy decision on Wednesday expected to be inadequate, but reports that the White House wants to take more time to decide who to nominate as the next Federal Reserve Chairman raises fresh concerns. As Janet Yellen is now the clear front-runner, it should be a no-brainer for President Obama, and he should be able to make the announcement by the end of this week or the beginning of next week, at the latest. She's been the more palatable choice all along, has extensive experience guiding monetary policy, and was a key architect of the quantitative easing (QE) program. Furthermore, Yellen is an advocate of forward guidance and a keen economist with a deep understanding of the pressures facing the US economy and the consequences of monetary policy.

However, concerns about her leadership style and her lack of a deep working relationship with the Presidential administration could be two reasons why Obama is hesitating. In general, President Obama prefers team players, and Yellen is more an activist and leader who urged her counterparts at the Fed—including current Fed Chairman Ben Bernanke—to share her views.

Debt Ceiling Rears Its Ugly Head Again

At the same time, talk about the debt ceiling and a potential government shutdown is also gaining traction this morning following comments from Treasury Secretary Jack Lew, who said Congress should not wait until the eleventh hour to raise the debt ceiling.

For the past four months, the US government has been using emergency measures to avoid breaching the $16.7 trillion debt ceiling, and based on the current level of spending, the government could run out of cash by October, which could force a government shutdown in late September.

The last time the US government was officially shut down was in late 1995 and early 1996. A standoff between Democrats and Republicans shuttered the government during the Clinton Administration for five days in November 1995 and then for 21 days between December 15 and January 6. In both cases, the US Dollar Index dropped more than 0.65% before recovering quickly once Federal offices were reopened.

As a result, FX traders shouldn't be overly concerned about a government shutdown because the impact on the dollar is expected to be short-lived.

The Biggest Decision of Them All

Finally, the main focus is, of course, the Federal Reserve monetary policy decision this Wednesday, and we will cover that in greater detail leading up to the event. This morning's consumer price report confirmed that inflationary pressures in the US are virtually non-existent, so if the central bank wants to keep monetary policy at current levels, it certainly can.

See also: The Only 2 Reasons Left to Taper Now

CPI growth slowed to 0.1% in the month of August, down from 0.2% the month prior. Year-over-year gains dropped to 1.5% from 2.0%. Annualized core prices grew slightly faster, but are still running at very low levels.

Housing market activity held steady in September, but only after the August NAHB housing market index was revised down from 59 to 58. According to the Treasury, foreign purchases of US assets increased in July, with demand for Treasuries rising by $31.1 billion, up from sales of $67 billion the prior month. Japanese investors were the biggest buyers, accounting for $52 billion in demand.

By Kathy Lien of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.