After recovering some of its losses from the previous week yesterday, Cable (GBPUSD) has dropped off once again after hitting its 16 month high last week as an agreement regarding the fiscal cliff remains nowhere in sight.
After returning early from his Christmas holiday in Hawaii, President Obama has summoned Congressional leaders to a meeting at the White House in a last ditch attempt to salvage negotiations regarding the necessary tax hikes and spending cuts if the fiscal cliff is to be avoided. With the January 1st deadline literally now just days away, it would appear inevitable that the compulsory tax hikes and spending cuts enacted under George Bush, due to take effect in 2013, will now come into force early next year. These measures are expected to lead to increases in US household taxes by an average of $3,446, substantially cut defence spending, and according to the Congressional Budget Office, send the US economy back into recession in early 2013.
It is precisely these fears, that the fragile US recovery at present is nowhere near strong enough to cope with these shocks without avoiding falling back into recession, that are causing concern in the markets. Inevitably, such a scenario would negatively impact the world economy, especially Europe which had seemed to be very slowly pulling itself away from the abyss recently – all of these factors are helping create a rather toxic outlook for the global economy. This has therefore led to a substantial decrease in risk appetite and an increase in safe-haven demand over the last few days.
Today the Dollar has strengthened against the majority of its counterparts and GBPUSD is currently trading at 1.6078. Having fallen close to a key level of support at 1.6067 this morning, this could create a safety net for the pair, preventing further losses.