Currency watch: Back to business for victorious Obama, as Europe struggles on

Now that President Obama has secured a landmark second term in the White House, its back to business as usual, with the upcoming “fiscal cliff” problem the top priority.

The principal bone of contention relates to the impending expiration of tax cuts on high income earners in the US.

The savings which could be made by withdrawing this tax break would remove US$1.2 trillion (over the life of the programme) from the current deficit. The conflict arises as Republican leadership is adamant that no further tax increases should by imposed at all, irrespective of income bracket.

This is a prime example of the difference in opinion that needs to be set aside as a common stance needs to be reached and quickly. It is this potential stand-off situation that has the markets so worried about the upcoming situation.

The key for USD and the government will be the speed at which the government can act, any progress with regards tackling the bipartisan divide and working towards a common solution will strengthen USD especially heading into a time where GBP and EUR continue to struggle.

The US markets will also take strength from the continuity that comes with Ben Bernanke staying as head of the Federal Reserve. A new government would have meant a new chairman, which would have re-opened the debate of the benefits of the QE which would have stirred markets further.

Post-election risk has always been tepid, and yesterday’s performance was no different. With the elections out of the way, the narrative switched back to the Eurozone and the latest edition of “how not to cope in a global recession”.

Equities faltered as market fears over the impending “fiscal cliff” grew (which is set to be the go to reasoning behind poor risk liquidity and returns for the foreseeable future), the Greek parliaments acceptance of the austerity package and the hugely concerning deterioration in Germany.

Industrial production in Germany fell by -1.8 vs -0.5% (exp) for the month of September. We saw GBP/EUR spike up above the 1.25 level once more, with the likelihood that it will remain comfortable at those levels. The worsening situation in Germany has largely gone unnoticed, simply because there have been bigger distractions elsewhere. But recent data will be at the forefront of EUR sell-off in capital markets.

Jeremy Cook is chief economist at World First foreign exchange