Potential Reversals

U.S. politicians apparently have reached a compromise framework in order to raise its Debt Ceiling. The package was agreed to this weekend by leaders within the Democratic and Republican parties. The legislation still has to pass both Congressional halls, but appears that it may find enough backing. Going into the weekend on Friday as the political debate still raged in Washington, investors turned in another risk adverse trading session. Gold went to record highs. The EUR, GBP, JPY, and AUD all gained versus the Greenback. Also making matters worse on Friday for investors was an underachieving Advance GDP from the States which turned in a number of 1.3% compared to the estimate of 1.7%. Adding fuel to the outlook that the U.S. economy is slowing the Chicago PMI came in negative also with a result of 58.8 compared to the forecast of 60.1.

It is August which is typically a month investors like to rest up and take a break as they yearn for a good summer rally. However, there will be no rest for the weary this week in the Forex and Commodity markets because of the U.S. political situation, the European Debt Crisis which remains unsolved, and a huge amount of data that will come out in the coming days. Today the States will see the ISM Manufacturing PMI and the U.K. will publish its Manufacturing PMI. Key numbers will keep coming from all corners this week and Friday the Non Farm Employment Change results will be delivered. If that isn’t enough to create some tension, the ECB and BoE will issue their monetary policy decisions on Thursday.

After stumbling most of last week due to the political wrangling in the States, the USD will get plenty of attention early on as traders will have to take into consideration several complicated factors. Risk appetite is likely to increase early this week in the equity markets if a Debt Ceiling agreement is signed by President Obama. However within the context that economic data continues to stumble and not match the rhetoric of officials who continue to speak about ‘growth prospects’ instead of sluggish growth or even worse another outright recession by the U.S. and Europe, investors cannot be faulted for remaining rather cautious. An interesting barometer this week will be Crude Oil which has been in a consolidated mode for months now and should be used as a looking glass into physical demand.

Gold found itself at record highs on Friday reaching the 1630.00 USD range, but this morning it has come off of its platitudes and is around 1613.00 USD.  The impact from the Debt Ceiling agreement cannot be underestimated, but it remains to be seen how the broad markets react short term and long term. Like Europe, the States essentially has now pushed its problems down the road for another day. With a national election coming up next year in the U.S. this is not surprising, but questions will continue to be asked. Also the potential now exists that investors will once again turn their gaze to Europe and begin to focus on the Sovereign Debt issues which have not gone away and a bond market that continues to see yields getting hammered from the likes of Greece, Spain, and Italy.

The JPY went to the strongest parts of its range on Friday, but has given back some of its value as of this morning. The JPY remains a safe haven play, but with some risk appetite possibly about to emerge traders may begin to look for a bit of a reversal from the Japanese currency. The AUD is within the strongest part of its value and like the other major currencies will definitely prove tempting for some traders who have a taste for testing ranges.