In a final hour maneuver, Congressional leaders brokered a deal that will allow the US economy to avert the Fiscal Cliff and alleviate pressure on the financial markets. The passage is being considered by some to be a victory for US President Barack Obama. But, by others, it shifts the focus to mid February when discussions are likely to begin over the impending debt ceiling.

Breakdown of the Cliff Deal

Following months of discussions and political wrangling, the Fiscal Cliff deal included most of what had already hit the newswires.

Taxes on Top Earners – Income taxes are to be raised for top earners, effectively cancelling the Bush era tax cuts for individuals making $400,000 or more, and families earning over $450,000. The measure will raise the top tax rate to 39.6% from 35%. The hardest hit will be the top 1% of income earners in the US.

Capital Gains and Dividends Tax – Capital gains and dividend taxes on investments will increase, rising to 20% from 15%. This measures will include carried interest income used by most private equity managers.

Estate Tax - Taxes on estates will now experience a top tax rate of 40%. However, the rate isn’t expected to kick in on any estate worth less than $5 million.

Unemployment Benefits Extension – Under the current measure, unemployment benefits will be extended for one year along with tax credits for low income families.

Payroll Tax Expiration – A casualty of the Fiscal Cliff deal, the payroll tax holiday enacted two years ago will expire at the beginning of 2013. Although it only represents a 2% increase in payroll taxes, it is likely to effect up to 77% of taxpayers and their paychecks. The rate will increase to 6.2% on all income up to $114,000.

What Now?

With the bill set to be signed into law by US President Barack Obama, focus has now shifted to the impending debt ceiling debate – likely to begin in mid-February. The concern remains over the fact that Democratic leaders will need to make further concessions on spending to Republicans in order to allow an extension of the $16.4 trillion ceiling.

An inability to do so would plunge the government into a plausible shutdown. This will likely include cutbacks in entitlement spending and other programs in order to equalize Republican concessions for the Fiscal Cliff deal.

Outlook

For now, however, it seems that sentiment has calmed in the face of a Fiscal deal – and is likely to power markets and risk tolerance higher temporarily. In particular, the notion is expected to push USDJPY higher through till medium term resistance targets at 88.38. Currently, the major pair advancing on the level on a break higher above 86.00 on Monday.

USDJPYSource:  FXTrek Intellicharts