EUR/USD – Higher After Fiscal Cliff Deal

EUR/USD reacted enthusiastically to the news that a deal had been reached in Washington over the fiscal cliff issue. The euro pushed as high as 1.3299, but has since retracted to the mid-1.32 range. Without an agreement, tax hikes and spending cuts worth $650 billion would have automatically kicked in, and there were fears that this double-jab would push the US economy into recession. Although the deal is only temporary and does not deal with the budget ceiling or spending cuts, it does provide some short-term certainty, which is positive for market sentiment. The markets in Europe and the US are back in action after the New Year’s Day holiday. There was good news out of Italy, where Manufacturing PMI hit a nine-month high. Today’s highlight is US ISM Manufacturing PMI.
After intensive and tense talks, US lawmakers hammered out an agreement on fiscal cliff on January 1. With the US about to topple over the fiscal cliff, Congress pulled out all the stops and managed to cobble together a last minute agreement to avert the crisis.

The agreement permanently extends tax cuts for all earners up to $450,000 and retains other tax breaks for individuals and businesses. Although both the Senate and House of Representatives passed the deal by large margins, although there was plenty of grumbling on both sides of the political divide. The deal appears to be the lowest-common denominator that Republicans and Democrats could agree on, and the agreement fails to deal with two critical issues – the debt ceiling and spending cuts. The debt ceiling will be reached in February, and the fiscal cliff agreement simply delays spending cuts until that time. With Republicans and Democrats far apart on these issues, we could see another fiscal cliff crisis erupt next month.

Taking a look at Europe as we begin 2013, although the euro is looking sharp, the same cannot be said about the Eurozone economies. It was a tough year for the Eurozone, with the debt crisis sending economic shock waves throughout the continent. Greece and Spain are struggling, even with bailout funds, and Italy and France are facing tough times as well. 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 better shape, but is suffering from slower growth and higher unemployment. On the bright 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’s unlikely that that the currency can sustain these levels against the dollar if the EZ economies continue to struggle and growth fails to improve.

Back in the US, 2012 ended with much of what we saw throughout the year – a mixed bag of strong and weak data, making it difficult to put a finger on the direction of the US economy. Last week’s Unemployment Claims looked sharp, but Consumer Confidence fell to five-month low. New Home Sales failed to meet the estimate, but Pending Home Sales surprised the markets with a strong gain. Although there are signs that the US economy is improving, this zigzagging makes it difficult to predict what to expect in early 2013.

EUR/USD for Wednesday, January 2, 2013

EUR/USD January 2 at 10:35 GMT
1.3245 H: 1.3299 L: 1.3194

EUR/USD Technical

S3 S2 S1 R1 R2 R3
1.3130 1.3180 1.3240 1.3280 1.3350 1.3485

EUR/USD is showing volatility following the fiscal cliff agreement. On the downside, the pair is putting pressure on 1.3240 after retracting from its gains earlier on Wednesday. 1.3180 is the next support line. Looking at resistance levels, the pair briefly breached 1.3280, but this line is back in place as the pair has dropped back down. If the current fluctuations continue, we could see the proximate support and resistance lines (S1 and R1 above) face more pressure during the day.
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
EUR/USD ratio continues to remain static, as the current volatility has yet to be reflected in the ratio. Trader sentiment continues to be strongly biased towards short positions. This is an indication that most traders expect the euro to lose ground. The fiscal cliff agreement provided the catalyst for the euro to surge higher, although the pair has retracted and given up much of those gains.
As expected, the announcement from Capitol Hill that a deal had been reached in the fiscal cliff crisis was a dollar-negative event. EUR/USD was sharply higher in the Asian session, although a correction has occurred in the European session. We could see volatility throughout the day as the markets continue to digest news of the fiscal cliff deal.

EUR/USD Fundamentals
• All Day: German Preliminary CPI. Estimate 0.7%.
• 8:15 Spanish Manufacturing PMI. Estimate 44.9 points. Actual 44.6 points.
• 8:45 Italian Manufacturing PMI. Estimate 45.4 points. Actual 46.7 points.
• 9:00 Eurozone Final Manufacturing PMI. Estimate 46.3 points. Actual 46.1 points.
• 14:00 US Final Manufacturing PMI. Estimate 53.2 points.
• 15:00 US ISM Manufacturing PMI. Estimate 50.2 points.
• 15:00 US Construction Spending. Estimate 0.6%.
• 15:00 US ISM Manufacturing Prices. Estimate 51.4 points.
*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.

Kenny Fisher

Kenny Fisher

Market Analyst at OANDA
A highly experienced financial market analyst with a focus on fundamental and macroeconomic analysis, Kenny Fisher’s daily commentary covers a broad range of markets including forex, equities and commodities. His work has been published in major online financial publications including, Seeking Alpha and FXStreet. Kenny has been a MarketPulse contributor since 2012.