Tomorrow is the last day for US politicians to reach an agreement on the debt ceiling as October 17th around midnight New York time the US will slide down the road of debt default as it will not be able to service debt which expires the following week.
Market participants have been hopeful that the gridlock between socialists and the Republican Party would end and that Republicans will give in once again in order to save the country from default while no steps are being taken to avoid this dilemma again.
Current hopes are for a short-term resolution which will buy the US more time to debate without any long-term solution in place. Despite the optimism for at least a short-term deal before tomorrow midnight the US Dollar has sold off against the New Zealand Dollar as well as the Australian Dollar.
The NZDUSD is especially vulnerable for a correction as it has formed a double top formation while also trading within a rising wedge formation which are both bearish chart patterns. The AUDUSD has also overextended its current rally and traders should be looking for a correction.
A deal to extend the debt ceiling once again should result in a small and temporary USD rally which should be limited to several trading days. This should open buying opportunities after the correction and traders may want to analyze the charts and look into buying the dips on both currency pairs.
The US has faced the debt ceiling debate several times and always decided to extend the limits of how much debt the US is allowed to accumulate. The ceiling has always been extended and the problems for the US have increased with each USD borrowed.
While the Republicans are being blamed by the majority for a default should one happen, down the road they may be hailed for forcing the first steps in order to get a grip on the downward debt spiral which has haunted the US and is evident enough that the US has lived above their means for an extended period of time.
Volatility should increase throughout the rest of 2013 and into 2014. This should create plenty of trading opportunities both in forex markets as well as equity markets. The USD is especially vulnerable to swings in both directions which will depend on how the uncertainty in the US will develops and play out.