EUR/USD – Over the Cliff We Go?

On the final trading day of 2012, EUR/USD has edged lower, and has fallen below the 1.32 level. Despite intensive talks in Washington to try and avert the fiscal cliff, the likelihood of a last minute breakthrough on Capitol Hill before the January 1st deadline does not appear likely. Market releases ended the year on a high note, as US Pending Home Sales jumped 1.7%, well above the forecast of a 0.3% decline. With the markets closed on Tuesday for the New Year’s holiday, trading volumes remain thin. This has reduced liquidity and could result in increased volatility as we wind up 2012. There are no scheduled releases from the Euro-zone or the US on Monday.

In Washington, the impasse over fiscal cliff continues, despite a rare Sunday session of both the Senate and the House of Representatives. However, there is still no progress to report in the fiscal cliff talks between the Republicans and the Democrats. Both sides remain far apart on the issues of tax increases and cuts to federal programs. The Republicans have blocked proposals to raise taxes on earners with incomes above $250,000, and the Democrats are dead set against any cuts to the Medicaid or Social Security programs. Unless a dramatic breakthrough is announced on Monday, the US will go over the fiscal cliff, meaning that 600 billion dollars in tax hikes and spending cuts will come into effect on January 1st. This double-jab could rock the fragile US economy and stifle the nascent economic recovery. Lawmakers on both sides have asked US vice-president Joe Biden to lend a hand and try to break the impasse. Senate Majority Leader Harry Reid said he is “hopeful but realistic”, but it’s doubtful if the markets are sharing his sentiment, with only hours left to reach an agreement to avert fiscal cliff.

In Europe, 2012 was a tough year for the Eurozone, with the debt crisis and a near Grexit sending economic shock waves throughout the continent. As we move into 2013, the health of the economies of the major players in the Eurozone does not look promising. Greece and Spain are struggling 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 brighter side, there has been significant progress in the Greek debt crisis, as aid is again flowing to Athens. Spain continues to insist that it does not need to ask for more bailout funds, as lower yields on Spanish bonds as reduced the country’s borrowing costs. 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.

Back in the US, recent US economic releases typified what we saw throughout 2012 – 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 zig-zagging makes it difficult to predict what to expect in early 2013.
EUR/USD for Monday, Dec 31, 2012

EUR/USD Dec 31 at 9:45 GMT
1.3191 H: 1.3236 L: 1.3176

EUR/USD Technical

S3 S2 S1 R1 R2 R3
1.3080 1.3130 1.3180 1.3240 1.3280 1.3350

EUR/USD has edged lower, but the proximate lines of support and resistance (S1 and R1 above) remain in place from last week. The pair has made a push towards 1.3180, and this level could come under more pressure. 1.3130 is a stronger line of support. On the upside, 1.3240 continues to provide resistance, and this line has strengthened as the pair has dropped below 1.32. With thin market trading, we could see some volatility from the pair on Monday.
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
EUR/USD ratio continues to remain static, with trader sentiment strongly biased in towards short positions. This is an indication that most traders expect the euro to lose ground. The euro has edged downwards, and dropped below the 1.32 line. However, for now, these losses are limited, and we can expect the ratio to remain as is unless the pair shows sharper movement.
As the markets are marked by thin trading, this could lead to some volatility, especially with the fiscal cliff deadline just around the corner. Any announcements out of Capitol Hill could affect the movement of EUR/USD. If, as expected, the US goes over the cliff on Tuesday, we could see the euro lose ground as markets sentiment drops and investors snap up the safe-haven US dollar.

EUR/USD Fundamentals
• There are no scheduled releases out of 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.

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.