Fiscal Cliff, OECD Warning Weigh On USDJPY

Includes: FXY, UDN, UUP
by: FXstreet

By Richard Lee

In an effort to reach out to business leaders, U.S. President Barack Obama met with prominent executives in Washington on Wednesday as the clock ticks down on the impending Fiscal Cliff. Meeting with the likes of leaders at Goldman Sachs (NYSE:GS) and Yahoo! (YHOO), the president was expected to hear corporate opinions on the cliff as a disagreement between both political parties continue to muddle the likelihood of a near term resolution of the $607 billion cliff. The resulting indecision will weigh on the USDJPY.

The Sticking Point

Fiscal cliff discussions continue to remain at an impasse following the U.S. president's recommitment to raising taxes for the country's higher earners. This would involve an expiration of the Bush era tax cuts and a raising of income taxes for individuals making more than $250,000. In addition, higher capital gains taxes would be considered.

Republican opposition, on the other hand, continues to support a reduction in entitlement programs like Social Security and Medicare, while backing a plan to decrease the amount of deductions that higher earners are able to capitalize on. However, Democratic leaders remain unconvinced that a reduction in deductions will not even come close to proposed tax revenue and is likely just political filler.

OECD Chimes In

As a result of the disagreement between both Republican and Democratic leaders, the Organization for Economic Co-operation and Development (OECD) issued a warning yesterday, citing that an activation of the Fiscal Cliff would pose "a large negative shock" that would "bring the U.S. and the global economy into recession". The organization's pessimistic Economic Outlook report also noted that any budget deficit reduction measures should be "done gradually and in the context of a well-identified medium term consolidation plan".

USDJPY Effects

The impending situation will continue to weigh on USDJPY prospects in the near term, minimizing any bullish continuation of the longer term trend, for now. As a result, look for technical resistance at 83.00 (and the 7-month high of 82.83) to remain a pivotal barrier in dictating future USDJPY directional bias.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.