Fiscal Cliff Deal Premonitory Of $1.33+ For 1 Euro?

Includes: ERO, EU, FXE, UDN, UUP
by: FXstreet

The self-inflicted political deadline to reach a fiscal cliff deal has been finally approved by the U.S. House of Representatives. Millions of U.S. citizens as well as market commentators are able to breathe a sight of relief, cheering the conclusion of this political pantomime. The final vote count stood at 257-167 in favor of the bill.

After both the U.S. Senate and the U.S. House of Representatives approved the bill, UBS strategist Gareth Berry, notes:

Tax hikes will still happen, but these will be diluted. Unemployment benefits are to be extended until end-2013. Planned spending cuts (which were due to take effect in January) will be postponed for two months.

Along the road, however, further unresolved issues remain, with the deadline to raise the federal borrowing limit being just 2 months away. As Mr. Berry adds:

"There will be another showdown within weeks which has the potential to be even more disruptive (given the U.S. debt ceiling must be raised at the same time if technical default is to be avoided)." However, for now, "the conditions seem right for a moderate celebratory brief rally in risk assets, and we would be reluctant to fight this just yet."

The natural behavior on the market (post fiscal cliff final deal through the House) during the Asian session on Tuesday was to engage in a textbook sharp sell-off of the U.S. dollar, with the unload of the greenback sending the euro as high as $1.3290, where heavy sell orders have been reported. The strong upmove threatens the 1.33/1.3305 limits, with a clear break higher raising the potential for further upside acceleration ahead towards 1.3375 March highs.

The sustainability of euros above $1.3250 will now be key to understanding the possibility of a clean break higher, a scenario awaited by committed longs. Traders should note that since the first test of 1.33 on December 19, the price has visited levels above 1.3250 on four occasions from a H4 perspective, where rejections were quite abrupt, suggesting an uncomfortably high euro/U.S. dollar exchange without a cliff deal. Now the bill has been cleared, an accumulation of H1 candles /2x or more H4 candles above 1.3250 will hint buyers are setting the ground for a possible impulsive move up, aiming to trip vulnerable stop loss orders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.