As the markets wind down for the Christmas holiday, EUR/USD is edging higher, and has pushed across the 1.32 line. US data continues to looks strong, but the fiscal cliff crisis continues to weigh on market sentiment. In Europe, Italian Prime Minister Mario Monti resigned , and Italians will again go to the polls to choose a new government, likely in February of next year. The last trading week of the year is marked by thin market trading, and there are no scheduled releases out of Europe or the US on December 25 or 26.
Last week’s US releases were positive for the most part, with GDP, Existing Home Sales and the Philly Fed Manufacturing Index all beating the market forecast. The one exception was Unemployment Claims, which was higher than expected. On Friday, US Core Durable Goods Orders surprised the markets with a robust 1.6% gain. The markets had forecast a slight decline, marking the third straight reading that the markets have badly underestimated this key manufacturing indicator. The dollar responded with gains against the euro and other major currencies.
Although US fundamentals continue to point to a more solid economic recovery, there is serious trouble brewing on the horizon, as the fiscal cliff clock continues to tick down before a series of automatic tax hikes and spending cuts automatically kick in. With Republicans and Democrats far apart on how to tackle spending cuts and tax hikes, the fiscal cliff negotiations in Congress are gridlocked, as each side continues to attack and blame the other for the impasse. There were some red faces on the Republican side last week, as Republican House Leader John Boehner threatened to pass a “Plan B” that would have avoided tax hikes for all Americans earning less than $1 million per year.
In the end the motion was withdrawn  to due lack of support on the Republican side. The Republicans took a gamble on Plan B, hoping that it would put the ball back in the Democrat’s court, and embarrass the White House if it went ahead and vetoed the motion. In the end, it was House Leader Boehner who had to wipe egg off his face, as Plan B turned out to be a futile political maneuver. Meanwhile, Congress is adjourned until December 27th, just days before the fiscal cliff kicks in. Will the lawmakers get their act together this week, or will we “go down the cliff” into 2013? The crisis could have a major impact on the markets, and EUR/USD could show some movement if there are developments in the crisis this week.
In Europe, the main development over the weekend was in Italy, where Prime Minister Mario Monti announced his resignation. Monti has headed the government for just 13 months, but is widely credited for helping stabilize the Italian economy during the difficult debt crisis. He tendered in his resignation after parliament approved the 2013 budget. Political and financial leaders in Europe would like him to run in the upcoming elections, but in Italy, the two main parties and a majority of Italians, unhappy with his austerity measures, have called upon Monti not to run. The markets will continue to keep a close eye on developments in Rome, as the country continues to struggle with a weak economy and huge public debt.
EUR/USD for Monday, Dec 24, 2012
EUR/USD Dec 24 at 10:00 GMT
1.3211 H: 1.3233 L: 1.3180
EUR/USD remained steady in the Asian session, and the pair consolidated around 1.3190. In the European session, the pair has crossed above the 1.32 line. Both proximate lines (S1 and R1) remain steady, as 1.3180 has strengthened in support as the pair has moved above 1.32. We could see the pair consolidate in the 1.32 range, as many traders will avoid taking large positions during the holiday week.
Current range: 1.3180 to 1.3240.
Further levels in both directions:
• Below: 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: 1.3240, 1.3280, 1.3350, 1.3485 and 1.3575.
OANDA’s Open Position Ratios
Trader sentiment for EUR/USD remains strongly biased in favor of short positions, as expectations remain that the euro will lose ground against the greenback. EUR/USD did lose ground on Friday, but has since corrected and crossed back over the 1.32 line.
EUR/USD remains steady as we begin the final trading week of 2012. Traditionally, the final trading week of the year is characterized by reduced liquidity and thin trading as market operations wind down. However, this can lead to some volatility, especially if there is some significant news development, such as the fiscal cliff crisis. If the impasse continues, market sentiment will sour and we could see the dollar improve. Conversely, if there are reports of progress, look for risk appetite to increase, which could bolster the euro.
• There are no scheduled releases from the Eurozone or the US on Monday.
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.