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The US Fiscal Cliff Explained

Good day forex traders.

Many readers have asked about the US fiscal cliff. What is it and what implications it may have on the currencies. This is a very good thought as this economic event will probably cause strong and far reaching reactions if materialized.

What is the US fiscal cliff?

It is a collection of spending reductions across the US government which will come into effect on 31 December 2012 and US taxation cuts which will expire on 31 December 2012.

Why are there concerns regarding the US fiscal cliff?

Should the spending reductions and expiration of tax cuts come into effect, it is feared that the US economy may run the risk of heading towards a recession again. Basically recovery and growth may derail. Furthermore unemployment may increase as a result of layoffs due to reduced spending. As US is the largest economy in the world, the global economy may be affected too.

How can the US fiscal cliff be avoided?

This will depend on whether the various parties of the US government can come to terms on how the US fiscal cliff can be avoided. In a nutshell, the Democrats are seeking increased taxation, especially of the wealthy ones while the Republicans are seeking more on the reduction of spending , especially of welfare schemes like medical care. Both parties must reach a common ground to move forward.


As always, no one can predict with 100% accuracy for forex. We will probably see volatility as the deadline looms nearer with no conclusion. If a deal is reached, relief may boast risk appetites while the reverse may fuel risk aversion. A better way to manage this will be proper money management 🙂 .

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