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The positive bias enjoyed by the euro during the last days started to fade on Friday as caution set in as the first round of "fiscal cliff" negotiations in the U.S. get underway and amid lingering uncertainty over Spain and Greece.

The euro weakened and recently fell back below the 1.2700 mark as Wall Street indexes tuned lower, weighed by risk aversion and disappointing economic data.

Euro back below 1.2700

After failing to decisively overtake the 1.2800 level on Thursday, the euro resumed its journey to the downside and fell below the 1.2700 mark in recent dealings. Technically, EUR/USD has been consolidating in a lower range this week, and a break below 1.2660 could lead the pair quickly toward 1.2600, while the former support at 1.2800 is now the first level to regain in order to improve the outlook. EUR/USD was last down 0.6% at the 1.2700/05 area.

On the other hand, fundamentally speaking nothing was resolved this week in Europe. "Considering that the single currency managed to move higher yesterday in the aftermath of the confirmation that it is in an official recession, we are clearly in an environment where fundamentals have taken a back seat", says the TD Securities team. "For EUR/USD the downside level to watch is Tuesday's low of 1.2662, while the key topside level is marked by the 200-day MA near 1.2810".

Meanwhile, the Wells Fargo team argues that given the mixed nature of recent FX trading, currency markets will likely remain reactive to headlines. "While we don't have a strong directional view, we are more inclined to downside rather than upside for most foreign currencies over the near-term", they say.

U.S. fiscal cliff talks eyed

U.S. President Obama is scheduled to meet with congressional leaders to start working towards an agreement that would avoid the severe fiscal adjustment that will begin to take effect from early 2013 on the basis of current legislation.

"While the early rhetoric from political leaders has indicated a willingness to be flexible, there is still a gap between the president and Republicans on the mix of tax increases and spending cuts that will be needed to reach a deal", says the Wells Fargo analyst team. "Wariness over the outcome of these initial talks is probably the main reason for market caution".

Source: Euro Unable To Sustain Momentum