EUR/USD – Slightly Higher as Fiscal Cliff Talks Resume

After a break for the Christmas holidays, the markets are back in action as we wrap up 2012. EUR/USD remains strong, and is trading above 1.3260. The final trading week of the year is usually characterized by quiet trading, but with the fiscal cliff talks going right down to the wire, we could see some volatility in the currency markets. On Thursday, there are three key releases out of the US. There are no scheduled releases out of the Euro-zone until Friday.

On Thursday, Congress reconvenes and the tough negotiations over fiscal cliff will continue. After all the finger-pointing and tough rhetoric over the past few months, it’s crunch time in Washington. If the Democrats and Republicans don’t find some common ground, tax hikes and spending cuts worth some $650 billion will go into effect on January 1. This double-jab could send the economy reeling and push the US into a recession in 2013. Can the two sides hammer out an agreement? The markets are hoping that at the very least, some type of stop-gap measure can be reached before the deadline. This would provide some breathing room while negotiations for a comprehensive deal continue, and hopefully calm down the jittery markets. What does the fiscal crisis mean for EUR/USD? An agreement would likely be dollar negative, as investors would feel more comfortable taking more risk. Conversely, if there are no signs of progress, market sentiment will sour and investors will flock to the safety of the US dollar.

In Europe, as we approach the end of 2012, the health of the economies of the major players in the Eurozone does not look promising. Unemployment is rampant in Greece and Spain, and Italy and France are also experiencing high unemployment. With these major economies facing small or even negative growth, there may not be a lot to cheer about in the early part of 2013. Germany, the economic locomotive of Europe, is in much better shape, but is suffering from slower growth and higher unemployment. On the brighter side, there has been significant progress in the Greek debt crisis, as aid is again flowing to Athens. As well, a framework has been agreed upon concerning a greater supervisory role for the ECB, with the goal of minimizing the impact of future banking crises in the Eurozone. As for the euro, it continues to trade at high levels against the dollar, despite all the economic troubles on the continent.

In fundamental news, there were two releases out of the US on Wednesday. The S&P/CS Composite-20 HPI, an important housing inflation index, continued its recent upward swing, with an excellent 4.3% gain. However, the Richmond Manufacturing Index dropped to 5 points, well below the market forecast of 12 points. On Thursday, there are three key US releases – Unemployment Claims, CB Consumer Confidence, and New Home Sales. The markets will be hoping for a repeat of last week’s strong US data. However, developments in the fiscal cliff crisis could have a much greater impact on the currency markets than this week’s economic releases. In the Eurozone, there are no scheduled releases out of the Euro-zone until Friday. Highlights include French Consumer Spending and the Italian 10-year Bond Auction.

EUR/USD for Thursday, Dec 27, 2012

EUR/USD Dec 27 at 9:50 GMT
1.3274 H: 1.3274 L: 1.3223

EUR/USD Technical

EUR/USD continues to push higher and has broken through resistance at it pushes above the mid-1.32 range. In the European session, the pair is testing resistance at 1.3280. We could see the pair break through this line and head towards 1.33. On the downside, 1.3240 is strengthening as the pair moves higher. 1.3180 is a strong support line.

Current range: 1.3240 to 1.3280.
Further levels in both directions:
• Below: 1.3240, 1.3180 1.3130 1.3080, 1.3030, 1.2960, 1.2890, 1.28, 1.2750, 1.2690, 1.2624, 1.2590 and 1.25.
• Above: 1.3280, 1.3350, 1.3485 and 1.3575.

OANDA’s Open Position Ratios
Over the past few days, we have seen the EUR/USD ratio has shifted slightly towards long positions. However, trader sentiment remains strongly biased in favor of short positions, as expectations remain that the euro will lose ground against the greenback. Although the pair continues to edge upwards, a correction is certainly a reasonable possibility, with three key US releases today and talks resuming on fiscal cliff. With the deadline on fiscal cliff only a few days away, any new developments could have a major impact on EUR/USD. If US lawmakers do manage to reach an agreement before year’s end, we could see the euro improve and a change in the EUR/USD open position ratio.

EUR/USD Fundamentals
• 13:30 US Unemployment Claims. Estimate 365K.
• 15:00 US CB Consumer Confidence. Estimate 70.3 points.
• 15:00 US New Home Sales. Estimate 382K.
*Key releases are highlighted in bold
*All release times are GMT

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.