After rallying around 100 pips from 1.3065 to reach its highest level since May 4th at 1.3175 in the American session, the EUR/USD has closed calm trading between 1.3155 and 1.3165 in a clear consolidation mode. In this way, the EUR/USD has resumed its positive weekly candles, and it has posted its fourth positive week in the last five.
The EUR/USD rallied during the American afternoon, breaking above several resistance levels to retest the top of its three-month range at 1.3175, where it had peaked twice in September before a leg lower took the pair toward 1.2660.
The greenback remains under pressure since the Federal Reserve introduced new easing measures on Wednesday. "Ultimately, the commitment is likely to keep U.S. dollar gains at bay in the medium term as inflationary pressures are likely to remain below the central bank's initial inflation target at 2% for at least the next two quarters," pointed out FXstreet.com analyst Richard Lee.
However, despite the further easing from the Fed and some positive developments from Europe earlier this week, the EUR/USD has struggled to make decisive moves as investors remain focused on U.S. budget talks, where limited progress has been made so far.
"While we are hesitant to take a stronger directional view, particularly with thin trading conditions likely around year-end, we still expect U.S. budget talks to run into some challenges thus, have a slight bias towards U.S. dollar strength and foreign currency weakness," said Nick Bennenbroek, Head of Currency Strategy at Wells Fargo Bank.
EUR/USD Retests Top Of Its Range
With no clear catalyst other than buying interest into the weekend, the EUR/USD rallied during the American afternoon to retest the top of its three-month range at 1.3175. According to FXstreet.com's Banks, Brokers and Experts poll, there is no faith in the EUR/USD yet. Regardless of recent gains, the pool shows that the EUR upside remains limited mid/long term. However, the 1.3500 area seems likely before the downside resumes.
Along the same lines, the Bank of Tokyo Mitsubishi UFJ analysts have a neutral view on EUR/USD for the week ahead. The bank states that the pair is set to remain in consolidation mode in the next week. They feel that more erratic price action can't be ruled out entirely as market liquidity thins heading into the Christmas holiday.
City Index's analyst Ashraf Laidi expects the "EUR/USD to rebound towards 1.32, followed by 1.33-34 nearing the end of December." Laidi states that "the ensuing reverse Head & Shoulder formation appearing in EUR/USD is a classic (and rare) bullish formation, with clear delineation of: i) a required preceding sell-off; ii) an isolated low, creating a left shoulder; iii) a renewed sell-off to create a bottom or a head; iv) a subsequent peak, creating a right shoulder; and v) a straight neckline coinciding with trendline resistance."
"The theoretical target interpolated from the reverse H&S suggests $1.38-40 is viable in by end of Q1 2013," adds Laidi.
On the other hand, Senior Analyst K. Kirkegaard at Danske Bank affirms that the USD would remain weak in the medium/long term. Danske's analyst concluded that the final expansion of the Fed's balance sheet would be a stunning $1.020 billion, negatively impacting the U.S. dollar. "We thus maintain our bullish carry view and remain long AUD, RUB, NOK against USD… EUR/USD may not be the most obvious trade to position for Fed balance sheet expansion, but we still look for a move higher over the coming quarters."
The Week Ahead
With all the commotion surrounding the yen for the past month or so, the time has finally come for the Japanese lower house elections. So investors must pay attention to Sunday's elections and specifically, beware of a USD/JPY u-turn.
"Yet considering that most investors expect Shinzo Abe to win, there's a strong risk of a buy the rumor, sell the news type of reaction in USD/JPY," points out BK's Kathy Lien. "In other words, rather than extending lower, the yen could actually rally if Abe wins."
In the words of FXstreet.com's Richard Lee, "if PM Noda is re-elected to head the country, it would mean business as usual, spelling a decline for the USD/JPY, possibly back to an exchange rate around 80." However, if Abe is elected, "expect the USD/JPY to run higher towards 85.00. Any retracement will likely be shallow and temporary, targeting the 83.00 round figure barrier."
Other key events for the week are:
1. U.S. Gross Domestic Product (December 20th)
2. German IFO Business Survey (December 19th)
3. BoE Meeting Minutes (December 19th)
4. Bank of Japan Monetary Policy Meeting (December 19th-20th)
5. RBA Meeting Minutes (December 18th)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.