On March 1st mandated government spending cuts due to failure to reach a consensus on spending are scheduled to take effect. These will culminate on the 27th of March when the US Governments spending authority expires. Action prior to that is not expected.
Presuming this ‘Congressional Sequester’ will end like the fiscal cliff issues of 2012 may be a big mistake. The political climate is not favouring that outcome. With no major elections scheduled for 2 years congress is expected to use the mandates for political cover and allow the cuts to happen. The cuts will occur according to most experts and congress will use the following chaos to force the cuts of their choosing.
Futures Trading in currencies will be effected as well as standard Forex and a careful analysis of key indicators you are using in your trading strategies is a must. The volatile market their will provide ample opportunities to profit from fluctuations in the USD against major currencies for those willing to test the waters.
Traditional thinking would suggest spending cuts will result in slowing of the US Economy and possible recession. While recession in the US would indicate a weakening dollar it must be considered that any recession in the US economy will dampen other global economies as well off. This may offset some of the decline.
A stronger USD may result if believed the spending cuts are needed for a long term positive effect on the economy. The strength of the dollar increasing as a result of reducing debt levels in the US is a possible mid to long term outcome.
Further supporting this idea is that the government will not be able to put together a spending or incentive plan to support the economy without spending authority. An artificial influx of new monies into the economy while being favourable to stocks often acts to weaken the USD. The mandated discipline may be looked upon favourably in the global economy. With the Federal Prime Rate is already hovering at .25%- .75% it is not possible to reduce it further. An increase in rate would however signal serious inflation concerns with a dramatic effect on the value of USD.
If you choose to take a position with the USD in the coming weeks volatility is obvious. Taking advantage of this volatility can be done with a price action strategy and using your Forex platform for automatic price point trades for timely profit taking and to reduce losses in excess of tolerances. Traditional indicators may be skewed by reactionary changes in currencies due to political and media reports.
The US Stock market risks are more predictable. Consumer confidence is already dropping on the media coverage of the upcoming weeks. The short term increase in consumer spending traditional for February and March during the US tax season is lower than normal due to this drop in confidence. The lower consumer spending when combined with drastic reductions in Government spending are expected to hit the stock markets hard as quarterly results are announced.