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As we've mentioned in our post on the coming week's market movers, the EURUSD rally may well continue despite the overall bearish outlook for risk assets. Just look at the likely market movers this week and how they can be expected to influence pair. We've already discussed them already here, so we'll confine our discussion to their specific EURUSD implications.

1. FISCAL CLIFF UNCERTAINTY: ANYTHING BUT WORST CASE SCENARIO BULLISH FOR EURUSD

The worst case scenario for markets is that the full wave of $600 bln in tax increases and spending cuts take effect, cut US GDP by 4-5% and send the world's largest economy into recession, and deepening the ongoing global recession.

If that extreme risk-off event happens, the USD benefits in two ways, both from the flight to safety demand, and also from the $600 reduction in the roughly $1.2 trln annual US deficit. The USD will be THE place to be.

Given that the opposite result (Washington defers most of the austerity, the US deficit continues to balloon and uncertainty over the fiscal cliff ends in favor of risk assets) is still what's ultimately expected, the EUR remains the likely beneficiary as it benefits from:

The increase in risk appetite

The further debasement of the USD as the US deficit rises, the Fed prints and debases the USD, while the ECB has yet to begin its own big printing program, the OMT.

2. FISCAL CLIFF TAX DRIVEN PROFIT TAKING: EURUSD BEARISH

Additional year end selling of risk assets as investors take capital gains at the lower 2012 rate hurts risk appetite and thus the EURUSD. If that risk aversion causes a spike in bond yields for Spain and/or Italy, change that forecast to very EURUSD bearish, for reasons discussed here.

3. QUADRUPLE WITCHING, DRAINING LIQUIDITY: EURUSD BEARISH

Given that this is more likely to be a bearish than bullish event, it's more likely to send the pair lower. Again, progress on a fiscal cliff deal that defers most of the austerity measures makes this a bullish event as the jump in risk assets would be amplified by the combination of above-average volatility and below average liquidity from the coming Christmas holiday.

4. TECHNICAL RESISTANCE: INFLUENCE ON THE EURUSD UNCLEAR

Most risk assets are already encountering strong long-term resistance; however the EURUSD is rallying for reasons mentioned in our weekly review and preview. Thus as long as markets continue to anticipate a favorable (risk-on) solution that defers US austerity measures and keeps Fed policy looser than that of the ECB, the pair is simply not as correlated to the S&P 500 or most other risk barometers.

FINAL THOUGHTS

Per the weekly EURUSD chart below, any decisive break over 1.32 opens the door for a move to 1.33 at which point it hits both prior price resistance and its200 week EMA (purple), highlighted by the mouse pointer.

ScreenHunter_02 Dec. 16 04.47

EURUSD WEEKLY CHART JULY 2011- PRESENT

Source: MetaQuotes Software Corp, thesensibleguidetoforex.com,

02 dec 16 0447

The big risk to the EURUSD rally is a negative surprise about Spain or Italy.

Regardless of what happens in the coming weeks, the biggest risk for those based in the USD, EUR, JPY, or other currencies subject to similar central bank policies is that you're assets will be dragged down as these currencies are further debased.

Disclosure/disclaimer:

No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.
Source: EUR/USD Weekly Forecast: To 1.33 And Beyond?