EUR/USD – Lower After Positive US Data

EUR/USD lost ground after there was some excellent numbers out of the US on Thursday. Final GDP climbed 3.1%, which was higher than the estimate, and Existing Home Sales posted its best performance since May 2011. This release is particularly encouraging, as it follows other strong housing numbers. The US housing sector, which has been a sore spot in the economy for quite some time, is showing signs of improvement. The Philly Fed Manufacturing Index, which had a terrible reading last month, roared back and climbed all the way to 8.2 points, an eight-month high. The one disappointing release was Unemployment Claims, which came in at 361 thousand new claims, slightly higher than the estimate of 358K. All in all, however, the data points to an improving US economy as the recovery appears to be gaining traction.

Although US fundamentals are certainly a cause of optimism, there is serious trouble brewing on the horizon, as the fiscal cliff clock continues to tick down. Fiscal cliff refers to the host of tax hikes and spending cuts which automatically kick in on January 1, 2013, unless US lawmakers take action. The combination of lower spending and higher taxes would do wonders for the US deficit, but could severely weaken the fragile US recovery, and push the economy into a recession. Congress has taken a break for the Christmas holidays, and will not reconvene until December 27, which is very close to the deadline. The Republicans and Democrats continue to dig in and blame each other for the crisis, but recent polls indicate that a majority of Americans think that the Republicans need to be more flexible in their positions, especially regarding tax hikes on the wealthy.

The Republicans are well aware of public sentiment, and have softened their positions and their rhetoric. However, there is still a significant gap between the sides as far as tax hikes and the extent of spending cuts to Federal programs. The Democrats strongly oppose such cuts, and have the support of the public when it comes to critical programs like Medicare. The political maneuvering between the two sides continues, as the Republicans tried to pass a bill known as “Plan B” which would have raised taxes only on those earning more than $1 million annually, but they did not have enough support for this initiative. The markets are getting increasingly nervous, and we could see more volatility in the currency markets if the impasse continues. In Friday’s releases, GfK German Consumer Climate disappointed, falling below the market forecast. There are seven releases out of the US, highlighted by Core Durable Goods Orders.

EUR/USD for Friday, Dec 21, 2012

EUR/USD Dec 21 at 10:50 GMT
1.3205 H: 1.3238 L: 1.3180

EUR/USD Technical

S3 S2 S1 R1 R2 R3
1.3080 1.3135 1.32 1.3235 1.3280 1.3335

EUR/USD dropped sharply during the Asian session, as it broke through support at the 1.32 line. The pair then rebounded and crossed back above the 1.32 line, which is being tested early in the European session. 1.3135 continues to provide significant support, and has held firm all week. On the upside, 1.3235 is providing weak resistance, and could also be tested as EUR/USD continues to show volatility. 1.3280 is providing the pair with strong resistance.

Current range: 1.32 to 1.3235.
Further levels in both directions:
• Below: 1.32, 1.3135, 1.3080, 1.3030, 1.2960, 1.2880, 1.28, 1.2750, 1.2690, 1.2624, 1.2590, 1.25, 1.2440, 1.2390 and 1.2250.
• Above: 1.3235, 1.3280, 1.3385, 1.3485 and 1.3575.

OANDA’s Open Position Ratios

EUR/USD continues to show more volatility, as the pair continues to show a lot of activity even though we are approaching the end of the year, which usually signifies less activity as market operations wind down. The pair lost ground following some strong US releases on Thursday (Dec. 20). The recent upward trend has stalled. Trader sentiment remains strongly tilted in favor of the short positions and an expectation that the euro will further weaken against the greenback.

The direction of EUR/USD is highly dependent on the fiscal cliff crisis in the US. 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.
EUR/USD lost ground in the Asian session, and the pair is having trouble crossing back over the 1.32 line. We could see more activity close to this level.

EUR/USD Fundamentals

• 7:00 German GfK German Consumer Climate. Estimate 5.9 points. Actual 5.6 points.
• 13:30 US Core Durable Goods Orders. Estimate -0.2%.
• 13:30 US Core PCE Price Index. Estimate 0.1%.
• 13:30 US Durable Goods Orders. Estimate 0.2%.
• 13:30 US Personal Spending. Estimate 0.4%.
• 13:30 US Personal Income. Estimate 0.3%.
• 14:55 US Revised UoM Consumer Sentiment. Estimate 74.9 points.
• 14:55 US Revised UoM Inflation Expectations.

*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.