Forex: EUR/USD Round-Trip To 1.3300 Following The 11th Hour Fiscal Cliff Deal

Includes: FXE, UDN, UUP
by: FXstreet

Following another 1.3300 testing on the eleventh hour deal on the U.S. fiscal cliff, and with a substantial drop to 1.3155 during the European and American session, the EUR/USD is closing the day at 1.3180, 0.15% below opening price action.

The EUR/USD tried again to break above the 1.3300 overnight, but the single currency lost impetus, punished during the European morning by the disappointing PMI prints out of the eurozone members, and later by the stronger U.S. ISM manufacturing.

It seems to be a band-aid deal, but the market received the new "fiscal cliff" deal with impetus and showing impressive stamina. In the U.S., it was the biggest first-session-of-the-year point gain since 2009, with the The DJIA closing at highs since October 18, the S&P 500 jumping to its highest level since September, and the Nasdaq to its highest since October 8.

However, as analyst Richard Lee said in a recent report, "the passage is being considered by some to be a victory for U.S. President Barack Obama. But, by others, it shifts the focus to mid-February when discussions are likely to begin over the impending debt ceiling."

Moving forward to Thursday, the most relevant release on the euro docket would be the German unemployment rate. Later on during the U.S. session, investors would expect the weekly report on the labor market and the ADP Employment Change that is anticipated to have picked up in the month of December, all preceding the FOMC minutes.

As for the short term, some traders are fading the Fiscal Cliff deal by "selling the EUR/USD despite a strong stock and commodity market," points out Elliott Wave Forecast's analyst Gregor Horvat. But he believes that "bearish is still not the right direction for the pair in low-liquid market."

EUR/USD seems to be "headed within wave (C) after sharp reversal from 1.3292," adds Horvat. "A five wave decline from that point should complete a fall and cause a bullish reversal for the pair, ideally from corrective channel support line. Key support is at 1.3140."

According to TD Securities, the best strategy is to buy the break of 1.3306. "After lagging their European counterparts over the past month, the AUD, NZD, and CAD are at the top of the FX performance rankings," wrote analysts Shaun Osborne and Greeg Moore, pointing to commodity currencies as the beneficiaries of the "risk-on" attitude post "fiscal cliff" resolution.

The risk-positive mood is also helping the single currency. "The EUR has benefited from the risk positive mood, but EUR/USD hasn't managed to make significant new levels above the December high-water mark (1.3306)," they said, adding that buying a break looks to be the best strategy.

In the long term, Scotiabank sees a EUR/USD potential decline to 1.27 by the end of 2013. "The EUR outlook is complicated on several fronts, with typical valuation tools failing. In the end, EUR/USD is the combined outlook of EUR and the USD, neither of which is particularly bright," says C.Sutton, Chief Currency Strategist at Scotiabank.

"For the EUR, the biggest weight is likely to be bouts of uncertainty driven by the evolving future framework of the EMU and the complicated politics that accompanies it. The most significant risk is economic contraction; however, our base case calls for modest growth in three of the four major economies by the second half of the year," concluded Sutton.

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.