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The U.S. dollar is stronger overall on Thursday as the initial enthusiasm surrounding the U.S. budget agreement started to fade. U.S. stocks retreated slightly after rallying on Wednesday in the wake of U.S. lawmakers' approval of a deal to avoid automatic spending cuts and tax hikes from taking effect this year.

In the macroeconomic domain, a couple of conflicting reports on employment failed to boost sentiment. The ADP report showed U.S. private sector created more jobs than expected in December while initial jobless claims increased last week.

Meanwhile, calm reigns in Europe despite the ongoing structural issues as investors focus turned to the U.S. budget issues within the last weeks. However, as the dust settles in America, old problems could reemerge and haunt the euro.

The U.S. nonfarm payrolls report is the next key event ahead, with analysts expecting a solid job gain in December.

Euro retreats below 1.3100

The euro reached a high of 1.3305 on Monday, propelled by optimism over the U.S. fiscal cliff talks, but came under pressure afterward as euphoria faded. Having lost over 200 pips within the last sessions,EUR/USD recently printed a 3-week low of 1.3081.

So the EUR/USD fell from a 9-month high to a 3-week low after the U.S. congress stroke a deal on the so-called fiscal cliff in what seems to be "buy the rumor, sell the fact" type of activity. The pair has been also weighed by soft European data and some profit taking after failure to take 1.3300.

The shared currency has stabilized between 1.3080/1.3100 but a clear break below recent lows could take the pair towards 1.3040. On the upside, the cross needs to regain the 1.3140/70 area to ease the short-term bearish pressure.

"Technical developments appear to have been the clearest EUR driver in recent weeks/months, which have been broadly positive (along with a market that was overly short). The overnight selloff, however, was a notable dent to the near term outlook", says the TD Securities team. "The break below 1.3150 broke the neutral range that has persisted since mid-December, and a push below 1.3115 broke November/January trend support. From here the next key level appears to be 38.2% retracement of the November/December rally, at 1.3060".

Meanwhile, Nick Bennenbroek, Head of Currency Strategy at Wells Fargo Bank argues that the FX markets are still searching for direction following the budget agreement. "Our near-term bias is lower for the euro and the pound, steady for the Japanese yen, and steady to perhaps slightly stronger for the commodity and emerging currencies", the analyst said.

Source: Euro Retreats As Dust Settles, NFP Report Eyed