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Senate agrees to end budget impasse: How will the decision impact the FOREX markets?

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Senate agrees to end budget impasse: How will the decision impact the FOREX markets?

The United States Senate reached an agreement to lift the budget impasse and increase the government’s borrowing authority. The agreement ends the 16-day partial government shutdown one day before the October 17 deadline.

How will the agreement impact the global foreign exchange markets?

The US dollar has faced considerable headwinds over the past two weeks, as an uncertain investor climate shifted the market’s appetite away from the greenback. Market participants reacted in a knee-jerk fashion to any news pertaining to the US budget ceiling debate, be it good or bad. For its part, the greenback advanced on any sign Congress was moving toward an agreement that would lift the impasse and end the partial government shutdown. Now that that the debt ceiling will be raised, volatility in the foreign exchange market should simmer down as investors set their eyes on the fundamentals.

Dollar pairs have experienced considerable volatility over the past several weeks, as investors tried to determine the likelihood of a US government default. As the world’s most traded currency, now accounting for 87 percent of all FOREX trades, the greenback dictates the flow of the foreign exchange market. With the impasse over, market participants can once again return to focusing on the economic data to analyze the pace of US recovery and determine the likelihood of a Federal Reserve bond taper over the next several months. Prior to the partial government shutdown, speculation concerning the Fed dominated the foreign exchange market.

The partial government shutdown dried the flow of economic data, which blurred the outlook on the US economy, and therefore the direction of US dollar pairs. Now that the government suspension has been lifted, market participants should expect the flow of economic data to return. The Federal Reserve said economic growth was ‘modest to moderate’ amid the budget impasse, giving market participants some insight into what to expect from the data wire over the next several weeks.

By the end of the New York session, the US dollar was treading water, according to Bloomberg’s US Dollar Index, which tracks the greenback’s performance against ten of its major peers. The dollar index had fallen more than four percent amid the impasse, after reaching a three-year high in July.

Over the next several days FOREX traders will have the opportunity to dissect the details of the budget accord and hopefully shift their attention back to the economic data. Prior to the impasse, the global FOREX market was very much driven by economic data and policy expectations.

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