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EURUSD WEEKLY OUTLOOK: BULLISH MOMENTUM VERSUS NEGATIVE FUNDAMENTALS

|Includes: DIA, FXE, UDN, PowerShares DB USD Bull ETF (UUP)

Here's a quick rundown of the EURUSD's prospects over the coming weeks as of the December 30, 2012.

FISCAL CLIFF DEADLOCK: NEGATIVE FOR THE EURUSD

The ongoing deadlock hit Western stock indexes this week, including the bellwether S&P 500, as discussed here. This political paralysis also suggests another coming threat to risk currency pairs like the EURUSD. In the coming weeks Washington must once again either raise the debt ceiling or cut debt.

The ongoing political dysfunction suggests that Washington's credibility, and credit rating, could suffer as much damage as it did during the prior debt ceiling battle in the summer of 2011. That one cost the US its AAA credit rating from the S&P and took the S&P 500 index down almost to almost 400 points below its current level.

DATA: NEUTRAL/NEGATIVE

The coming week brings a batch of EU and US data, as discussed here. The overall tone of data has not been good, and so is more likely to favor risk aversion and the USD. Until the fiscal cliff, and coming US debt ceiling battle are resolved without major US austerity, the economic calendar is unlikely to produce anything positive enough to keep the pair moving past upcoming resistance discussed below.

TECHNICAL PICTURE: MIXED

The weekly EURUSD chart below continues to show upward momentum in recent weeks.

ScreenHunter_04 Dec. 30 04.28

EURUSD WEEKLY CHART

Source: MetaQuotes Software Corp, thesensibleguidetoforex.com

04 DEC 30 0428

Signs of continued upward momentum include:

  • The 10 week EMA (blue) and 20 week EMA (yellow) are both close to crossing above the 50 week EMA (red)

So why do I see the overall technical picture as mixed?

Approaching strong resistance from the 200 week EMA between 1.33 and 1.34 (granted, there is still over 100 pips of headroom, enough room for short term longs, though).

The S&P 500, our preferred risk appetite barometer, has turned lower, creating a negative divergence. The EURUSD's rally since the middle of November has been in sync with risk appetite as represented by the S&P 500. We don't think the pair can sustain a rally while the index is falling.

CONCLUSION: OVERALL PICTURE NEUTRAL/NEGATIVE FOR THE COMING WEEKS

Market calm on the fiscal cliff is starting to unravel. Until we have a deal, particularly one that defers most of the fiscal cliff's austerity, it's unlikely that the pair can overcome the approaching resistance. Given its recent strong run higher, the pair is due for a break until it gets some help from US fiscal cliff news.

Given that major risk barometers like the S&P 500 still near long term highs, already pricing in a US fiscal cliff deal and quiet in the EU, any resolution of the fiscal cliff and debt ceiling may well yield little more than a brief relief rally, if not a sell-the-news pullback.

With global economic growth expected to be weak for at least the first half of 2013 and no real repair of the EU debt situation, what's left to drive the pair much higher?

Oh, right, yet more stimulus, debt, and money printing.

As long term stores of value, neither the EUR or USD inspires great confidence given that both the Fed and ECB are committed to open ended money printing. That means these currencies will depreciate relative to better managed currencies and hard assets, especially as the global economy recovers.

If most of your assets are denominated in the EUR, USD, JPY, or other currency subject to similar central bank policies, you need to diversify your currency exposure just as you would diversify by asset class and sector.

There are currency diversification solutions to fit most needs. The problem for most people has been finding them. Specifically:

  • Most forex guides focus on trading styles that are too risky and demanding for most people.
  • Most foreign investing guides focus on the fundamentals of a given recommended asset without giving enough consideration to the currency to which they're linked.

I've tried to provide a variety of solutions that avoid these problems in my book, The Sensible Guide To Forex (Wiley & Sons, 2012). See here or here for details.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.