Progress. That’s one word you don’t hear often when talking about the U.S. fiscal cliff issue. But yesterday, after days of tense talks, the U.S. Senate finally voted to approve a budget deal negotiated with the White House. The final tally was 89 to 8.
The proposal, which is aptly-named the Taxpayer Relief Act, aims to avert the U.S. fiscal cliff. It must now go through the Republican-dominated House of Representatives to become a law.
Barack Obama called the House of Representatives to pass the deal. He said that even though both camps–the Democrats and Republics–did not get everything that they wanted, the deal was the correct thing to do for the country. He encouraged the House of Representative to approve it without delay.
John Boehner, the Republican House Speaker, responded to Obama by saying that the Republicans will consider it, but only after they have reviewed it. Boehner showed neither support nor opposition to the tax deal.
This recent development is certainly a step in the right direction, but before you celebrate, know that the deal wouldn’t end the fiscal cliff problem. The Taxpayer Relief Act, as the name suggests, only addresses the tax issue. There is still the issue of spending cuts, which economists say will be a tougher nut to crack.
I can’t deny that the deal had a positive effect on the market though. In the stock market, the S&P 500 broke its 5-day losing streak and recovered all of the losses it incurred last week by rising 1.7%. Meanwhile, EUR/USD’s currently trading around the 1.3300 level, up from its opening price this year at 1.3187.
But what will happen if the deal isn’t passed? What then, Forex Gump?
Aye, then we’d have a problem, my friend! If U.S. lawmakers fail to come to an agreement and resolve this critical issue, it would trigger automatic tax hikes and across-the-board spending cuts to the tune of 600 billion USD-something that could drag the U.S. back into recession.
And as you know, when the world’s largest economy (a.k.a. the U.S., for those of you who didn’t pay attention in the School of Pipsology) goes through hard times, the whole world feels it. So you can bet that there are more than a few economists that have got their fingers crossed, hoping for a positive resolution to this crisis.
It’s been about 8 months since the pair last traded above 1.3300, but in recent weeks, it’s been knocking on the door of this resistance level as though it’s ready to bust through. And from a fundamental perspective, a new high on EUR/USD makes sense.
On one hand, if the Taxpayer Relief Act is passed into law, a risk rally could ensue and lift the pair to a new high. And on the other hand, if the act gets rejected, it could downright sap demand for the dollar.
So really, the way I see it, no matter which way the coin lands, EUR/USD looks poised to climb higher. But then again, that’s just this old man’s opinion. What do you think?