Market Overview

EUR/USD – Losing Ground as Fiscal Cliff Hopes Fade

EUR/USD is weakening in Friday's European session, and has fallen below the 1.32 level. With no progress to report on the fiscal cliff talks, hope is fading that a deal will be reached before the January 1 deadline. There was mixed market news out of the US on Thursday, as CB Consumer Confidence, and New Home Sales both fell below the estimate. However, Unemployment Claims looked sharp, as the key employment indicator easily beat the forecast. On Friday, the markets are busy in both Europe and the US. In the Eurozone, French Consumer Spending posted a small gain, while Eurozone Retail PMI fell to a four-month low. Today's highlight is US Pending Home Sales, which comes on the heels of Thursday's New Home Sales.

In Washington, the impasse over fiscal cliff continues, with the clock ticking. After all the rhetoric, mud-slinging and finger pointing, Republicans and Democrats must again try to find common ground and show more flexibility if the fiscal cliff is to be averted. If the sides can't get their act together before January 1st, some $650 billion in tax hikes and spending cuts will automatically kick in. This double-jab could stifle the nascent economic recovery and push the US economy into recession in 2013. Talks on Thursday went nowhere, with Senate Majority Leader Harry Reid warning that the US was headed over the cliff unless the Republicans gave up some ground on tax hikes. Optimism at reaching a deal is fading fast, but negotiations will continue on Friday and the weekend.

In Europe, the markets took a break for Christmas, with the hope that things will improve in 2013. As we wrap up the year, the health of the economies of the major players in the Eurozone does not look promising. Unemployment is rampant in Greece and Spain, and Italy and France are also experiencing high unemployment. With these major economies facing small or even negative growth, there may not be a lot to cheer about in the early part of 2013. Germany, the economic locomotive of Europe, is in much better shape, but is suffering from slower growth and higher unemployment. On the brighter side, there has been significant progress in the Greek debt crisis, as aid is again flowing to Athens. As well, a framework has been agreed upon concerning a greater supervisory role for the ECB, with the goal of minimizing the impact of future banking crises in the Eurozone. As for the euro, it continues to trade at high levels against the dollar, despite all the economic troubles on the continent.

In market news, Thursday's US data was disappointing. New Home Sales came in at 377 thousand, falling below the forecast of 382K. CB Consumer Confidence, a key consumer indicator, dropped sharply to 65.1 points, its lowest level since August. The estimate stood at 70.3 points. Unemployment Claims did look sharp, falling to 350K, easily beating the estimate of 365K. Pending Home Sales will be released later on Friday, the second key housing indicator in as many days. If this release also falls below the forecast, it could be sign of weakness in the US housing sector, a key engine of economic growth.

EUR/USD for Friday, Dec 28, 2012

EUR/USD Dec 28 at 9:55 GMT
1.3189 H: 1.3256 L: 1.3180

EUR/USD Technical

S3 S2 S1 R1 R2 R3
1.3080 1.3130 1.3180 1.3240 1.3280 1.3350

EUR/USD has reversed movement and dropped sharply, crossing below the 1.32 line. The pair is testing support at 1.3180, and we could see the pair break through if the euro continues to lose ground. The next support level is 1.3130. On the upside, 1.3240 is back again in a resistance role. This line has strengthened, with the pair trading at lower levels.
Current range: 1.3180 to 1.3240.

Further levels in both directions:
• Below: 1.3180, 1.3130, 1.3080, 1.3030, 1.2960, 1.2890, 1.28, 1.2750, 1.2690, 1.2624, 1.2590 and 1.25.
• Above: 1.3240, 1.3280, 1.3350, 1.3485 and 1.3575.

OANDA's Open Position Ratios
Despite the euro losing ground in Friday trading, EUR/USD ratio has shown no change. Trader sentiment remains strongly biased in favor of short positions, as most traders expect the downward correction to continue. If the pair continues to weaken, we could see the ratio change as more short positions are filled.
US data this week was less impressive than the previous one, once again calling into question the strength of the economic recovery. However, the main focus of the markets will be the fiscal cliff crisis. With the deadline on fiscal cliff only a few days away, any new developments could have a major impact on EUR/USD. If US lawmakers do manage to reach an agreement before year's end, we could see the dollar lose ground against the euro. Conversely, if the impasse continues, market sentiment will be negative, and the dollar could broadly strengthen.

EUR/USD Fundamentals
• 7:45 French Consumer Spending. Estimate: 0.0%. Actual: 0.2%.
• 9:10 Eurozone Retail PMI. Actual: 44.5 points.
• Tentative: Italian 10-year Bond Auction.
• 14:45 US Chicago PMI. Estimate: 51.2 points.
• 15:00 US Pending Home Sales. Estimate: -0.3%.
• 15:30 Natural Gas Storage. Estimate: -73B.
• 16:00 US Crude Oil Inventories. Estimate: -1.6M.
*Key releases are highlighted in bold
*All release times are GMT

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