EUR/USD Lacks Stimulus: Earnings, Fed Speeches And ECB Eyed

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

With the year-end market euphoria slowly but steadily losing its momentum, the European shared currency approaches the London session in apparent tranquility at USD 1.3070. The Japanese Yen topped the climbers board vs. G10 currencies on Tuesday, which continued to strengthen on profit taking, followed by the U.S. dollar.

News that the Japanese government will engage in buys of the European Stability Mechanism bonds was not enough to underpin the euro, which showed a mere correction run in nature. This despite that European bonds across the bloc were higher on the day, having benefited from the kind Japanese gesture. Volatility in the euro should be depressed today, as traders remain sidelined ahead of Thursday's European Central Bank meeting.

In the U.S., the phenomenon of higher bond yields, with the 10 year U.S. Treasury yields up from 1.62% to 1.87%, 1-year high, according to Kathy Lien, co-founder at BKAssetManagement, "reflects worries that the Fed could end asset purchases in 2013."

The first part of the fiscal cliff is out of the way, which has somehow decreased the perception of uncertainty. Despite this, Ms. Lien finds it hard to believe that the fiscal cliff deal

has really brought forth a new sense of stability because the performance of the equity and currency market suggests that investors are still nervous...

It is a matter of weeks until the debt ceiling becomes a pressing issues for U.S. politicians, but in the meantime, as Kathy suggests, "its all about earnings and comments from Federal Reserve officials."

Ahead of the U.S. debt ceiling negotiations, Sean Callow, FX strategist at Westpac, thinks risk currencies "should suffer damage at times, especially in mid- to late February" he notes. The analyst seems confident that both the USD and Treasuries, "should thus find safe haven demand as the Congressional name calling reaches its peak" he adds.

Mr. Callow expands:

But with a ratings downgrade unlikely - at least not yet - and investors likely to remain confident that default is not seriously being considered, the damage to the likes of AUD, EUR and NZD should be contained. The episode may well be best viewed as a chance to buy dips in risk assets amid mostly more favorable global conditions in H1 2013. But risks to this view are skewed to the negative side for risk assets, with a prolonged standoff more likely than a quick resolution.

In view of our chief analyst, Valeria Bednarik, the technicals in EUR/USD seem to indicate that the 38.2% retracement of it latest slide at 1.3110 will be a tough short-term resistance to break ahead of the ECB. On the downside, a break below 1.3040 area is necessary to expose 1.3000 price zone, Valeria says, adding that further slides are not yet seen.

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.

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