Disenchantment is the word of the day. After hitting the highest level since April 4th at 1.3310, the EUR/USD turned lower and retraced all of its intraday gains, weighed by U.S. President Obama's threat to veto Republicans' Plan B in negotiations to avoid the "fiscal cliff." The situation was similar in stocks, with the major indexes closing with red numbers.
Speaker John Boehner defied President Obama and said the House of Representatives will pass a budget proposal that the President had already threatened to veto. It presented a clear picture about the impending fiscal cliff talks and the disenchantment surrounding them. However, the setback of the euro versus the dollar was contained by the 1.3200 zone, and the pair has spent the last hours in a pretty tight range just above the mentioned support.
As sentiment continued to improve in the eurozone, FXstreet.com Chief Analyst Valeria Bednarik believes that the EUR/USD may see some limited bearish correction, "more on profit taking and extreme readings rather than anything else."
As for the short term, below 1.3200, next supports could be found at 1.3185 (December 17 high), while on the upside, resistances are seen at 1.3307 (intraday high), 1.3350 and 1.3385 (March 27 high).
Knocking On The 1.3300 Door
Investors seem to have forgotten all about the eurozone debt crisis and shifted their attention to the U.S. budget negotiations, which have been driving price action lately. But according to FXstreet.com analyst Richard Lee, the IFO, ECB and Greek bond status supports the EUR/USD surge. Lee states that "any short-term correction is likely to see formidable support at 1.3181."
According to the TD Securities team, market worries about the "fiscal cliff" may not pick up until the end of the week. "Provided we don't get a fiscal cliff shock, a persistent grind higher looks to be the most likely scenario, which could see EUR/USD in the upper 1.35 area in the next few weeks," they commented.
City Index's analyst Ashraf Laidi was one of the initial bullish experts on the unique currency, as he 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 and Shoulder formation appearing in EUR/USD is a classic (and rare) bullish formation, with clear delineation of: i) required preceding sell-off; ii) isolated low, creating a left shoulder; iii) a renewed sell-off to create a bottom or a head; iv) 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.
The Day Ahead
Now that the Japanese lower house elections are over, traders' focus is being placed on the Bank of Japan's monetary policy decision. "This decision will be important one for the underlying currency," points out FXstreet.com's Lee, "which continues to lose against the U.S. dollar."
According to Lee, if BoJ goes for further monetary easing, investors should expect the USDJPY to surge higher, towards 85.50 in this case.
Other events that investors must follow are Jobless Claims, Existing Home Sales and the Conference Board leading index in the United States. In Europe, UK Retail Sales and the European Systemic Risk Board Meeting.