Failure to resolve US debt issue may see US credit rating downgraded

Home » Foreign Currency News » Failure to resolve US debt issue may see US credit rating downgraded

Given that the deadline to increase the US debt ceiling and reduce the spending deficit is only a week away, it is worrying that the Democrats and Republicans remain deadlocked over plans to achieve this. Although a default on US debt is relatively low risk, that risk is steadily increasing as the talks have repeatedly broken down.

If they fail to resolve the issue the US's AAA credit rating is likely to suffer a downgrade, debt funding costs will increase and the US Dollar is likely to come under more selling pressure as investors look to commodity assets with the commodity currencies (namely the Australian Dollar and New Zealand Dollar) likely to strengthen.

Neither the Democrats or Republicans should underestimate the markets ability to punish their economy if no agreement is reached. Furthermore, how foolish the US Government would look having lectured the Eurozone periphery to rectify their fiscal deficits?

Yesterday's UK data revealed that mortgage approvals by the British Bankers' Association continued at a low level in June, with 31,700 approvals.

Today sees the UK release a flash estimate of Q2 GDP, with the market consensus expecting this to report modest growth of just 0.2% quarter-on-quarter. Given the reports in the press, suggesting UK GDP could have contracted in Q2, any growth should be a relief to the markets and prompt a rally in Sterling.

Ultimately though, this release will once again demonstrate the headwind the UK economy faces after the years of excess. With fiscal austerity remaining a priority, personal debt burdens excessive and signs of slowing global growth, the UK will do well to grow in excess of 2% annually at any time in the next couple of years.