FXstreet.com (Barcelona) - After the senate-approved fiscal deal managed to inspire a year-end rally in the 11th hour, traders were anticipating that the overstretched risk rallies had its intra-day candles numbered on an actual final deal by Congress, as 'buying the rumour and selling the fact' is a strategy still highly effective in certain market conditions. In turn, what we saw last Wednesday was Wall Street having bought the rumour on Monday but also buying the fact.
The S&P500 added 1.8% on top of Monday's 1.7% gain. Interestingly, Nomura has recently put out a research note in which they note that over the past 20 years, the S&P500 does seem to show a positive correlation in the first week of January and the rest of the year, says Saeed Amen, Nomura FX strategist. "The S&P500 tends to rally in the first few days of the year, although after that, price action is more mixed in our sample" he adds.
Despite the optimism in equities, Kathy Lien, co-founder at BKAssetManagement, notes: "The problem is that there's a lot of unfinished business in Washington. Spending cuts still need to be negotiated along with additional tax reform and an increase to the debt ceiling. As quickly as they have penned the Fiscal Cliff deal, Congress will need to start negotiating a higher debt ceiling. The drama hasn't ended because Republicans won't readily agree to a higher debt limit without offsetting spending cuts, which the Democrats oppose. Some investors are also worried about the impact of the payroll tax hike on Americans."
The EUR/USD, in contrast, broke the correlation with the S&P500, and was a victim of a market uncommitted to show strength above the 1.3333/10 resistance, having proved very resilient since the first test on Dec 19. Ahead of London, and after losing the 1.3160 support through Asia, the pair is now facing some buying interest at 1.3130, area of confluence manifested by sequence of highs at October 18/December 5, with the 20-day EMA also crossing at the exact same level.
In EUR/USD, "it is very difficult to read anything into how spot performs in the first week and during the rest of the year" the Nomura analyst notes. Mr. Amen notes though that EUR/USD "has a tendency to fall in January, a behaviour which has been relatively consistent across the past decades in our sample."
Technically, Valeria Bednarik, chief analyst at FXstreet.com, observes that should 1.3140/50 area give in, "it will likely open doors for further slides in the common currency, although if market sentiment remains strong, a recovery above 1.3200/10 may see the pair reaching again 1.3250 price zone" she notes.
According to UBS technical analysts, "the important support zone lies at 1.3093/42, and while this holds, there is potential for the pair to resume strength." UBS notes key resistance at 1.3308 ahead of 1.3386.
On the fundamental front, it's again that time of the month to start thinking on the NFP jobs number, due to be published on Friday. Today's ADP report may be a good leading indicator to follow, together with challenger job cuts and jobless claims. Ms Lien notes: "Overall, we expect these reports to show continued improvements in the labor market particularly since jobless claims in December have been on average lower than November."
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.