Forex Analysis: Dollar May Extend Gains on Lack of "Fiscal Cliff" Progress

The US Dollar may extend gains on the back of risk aversion amid signs of continued deadlock as US officials struggle to avert the looming “fiscal cliff” ahead.

Talking Points

US Dollar May Extend Gains on Lack of Progress in “Fiscal Cliff” Negotiations
Japanese Yen Corrected Higher Overnight After Hitting 6-Month Low Yesterday
US Industrial Production Data Unlikely to Yield Strong Response from Markets

Forex markets consolidated in quiet overnight trade as traders waited for direction cues from a rumored meeting between US President Barack Obama and Congressional leaders as the “fiscal cliff” fiasco continues to play out. The Japanese Yen corrected narrowly higher as prices corrected following two days of aggressive selling that put an index of the currency’s average value against its leading counterparts at the lowest in six months.

With the election out of the way, the re-elected Democratic president must cobble together a deal with a divided Congress to avert the onset of steep tax hikes and spending cuts due to be triggered at the turn of the calendar year. The Congressional Budget Office (CBO) estimates that if the hefty dose of austerity is allowed to proceed as-is, it stands to trim US GDP growth by a hefty 0.6 percent in 2013, tipping the economy into recession in the first half of the year.

In an environment where investors are hoping a firming US recovery will help countervail headwinds from Europe and Asia, the prospect of such a scenario is decidedly negative for market sentiment. That means traders will closely monitor commentary from US officials, with signs of persisting deadlock likely to amplify risk-averse tendencies and boost the safety-linked US Dollar against most major currencies.

The economic calendar is broadly uneventful in European hours, with US Industrial Production data amounting to the last bit of noteworthy event through the week-end. Expectations suggest output grew 0.2 percent in October. This would mark a slowdown from the 0.4 percent increase recorded in the prior month but fall broadly in line with the 12-month average at 0.23 percent, hinting a print in line with expectations is unlikely to stir much by way of volatility. S&P 500 futures are pointing cautiously lower, warning of a risk-off mood prevailing into the opening bell in Europe.

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Euro Session: What to Expect

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