Market Overview

EUR/USD – Losing Ground as Slide Continues

EUR/USD initially reacted enthusiastically to the news that a deal had been reached in Washington over the fiscal cliff issue, but the pair has since retracted. The euro had climbed as high as 1.3299 on Wednesday, but has dropped sharply since, falling to the low-1.31 range. Will the volatility continue? In fundamental news, there were positive employment figures from both Spain and Germany on Thursday. In the US, the markets will be watching two key employment releases – ADP Non Farm Employment Change and Unemployment Claims. The other highlight is the minutes from the FOMC's most recent policy meeting.

With the US staring at the fiscal cliff and the threat of a crippling recession in 2013, Congress pulled out all the stops and managed to cobble together a last minute agreement to avert the crisis. The agreement permanently extends tax cuts for all earners up to $450,000 and retains other tax breaks for individuals and businesses. Although both the Senate and House of Representatives passed the deal by large margins, although there was plenty of grumbling on both sides of the political divide- perhaps proof that the deal reached was a true compromise.

Most notably, the agreement fails to deal with two critical issues – the debt ceiling and spending cuts. The debt ceiling will be reached in February, and action will have to be taken to avoid a default on the country's debt. Republicans are expected to demand cuts in programs such as Medicare and Social Security, while the Democrats vehemently oppose any reductions in these programs, and favor raising the debt ceiling, which is what Congress agreed to in 2011.

The IMF has also weighed in, saying that the fiscal agreement is not enough, and that the US must take further action to deal with its long-term debt problem. The IMF call for Congress to quickly approve a comprehensive plan which to “ensure both higher revenues and containment of entitlement spending over the medium term”.

Taking a look at economic releases, Spanish Unemployment Change was outstanding, posting a sharp drop of 59.1 thousand. This surprised the markets which had expected an increase of 50.3K. In Germany, the Unemployment Change indicator easily beat the estimate for the second straight month. There were three thousand new claims in December, but this was well below the estimate of 11K. The markets will be hoping for similar good news from the US, which releases its first employment numbers of the year later on Thursday.

As we start 2013, a look at recent key US releases points to a mixed and confusing picture. Employment numbers improved in December, but consumer confidence fell badly. Housing figures were mixed as well, as New Home Sales were down but Pending Home Sales rose sharply. Although there are signs that the US economy is improving, this zigzagging makes it difficult to predict what to expect in early 2013.

EUR/USD for Thursday, January 3, 2012

EUR/USD January 3 at 10:15 GMT
1.3114 H: 1.3189 L: 1.3112

EUR/USD Technical

S3 S2 S1 R1 R2 R3
1.2960 1.3030 1.3080 1.3130 1.3180 1.3240

EUR/USD continues to fluctuate sharply. The pair's rally on Wednesday now feels like the distant past, as the euro continues to slide toward the 1.31 line. There is support for the pair at 1.3080. This line has held firm since mid-December, but could see activity if the current downward trend continues. On the upside, 1.3130 is providing weak resistance, after being in a support role for the past two weeks. 1.3180 is the next line of resistance. It has become stronger as the pair trades at lower levels.
Current range: 1.3080 to 1.3130.
Further levels in both directions:
• Below: 1.3080, 1.3030, 1.2960, 1.2890, 1.28, 1.2750, 1.2690 and 1.2624.
• Above: 1.3130, 1.3180, 1.3240, 1.3180, 1.3130, 1.3280, 1.3350, 1.3485 and 1.3575.

OANDA's Open Position Ratios
Despite the ongoing volatility characterizing EUR/USD, the ratio is showing very little change. Trader sentiment continues to be strongly biased towards short positions, an indication that most traders expect the euro to lose further ground. If the downward trend continues, we could see the euro trading back at levels reached in early December.

As expected, the announcement from Capitol Hill that a deal had been reached in the fiscal cliff crisis was a dollar-negative event. However, the ensuing sharp downward correction did catch the markets off guard, and the volatility shows no signs of letting up. EUR/USD is testing the 1.31 line, and could break below it later on Thursday.
EUR/USD Fundamentals
• 8:00 Spanish Unemployment Change. Exp. 50.3K. Actual -59.1K.
• 8:55 German Unemployment Change. Exp. 11K. Actual 3K.
• 9:00 Eurozone M3 Money Supply. Exp. +3.8%. Actual 3.8%.
• 9:00 Eurozone Private Loans. Exp. -0.5%. Actual -0.8%.
• 12:30 US Challenger Job Cuts.
• 13:15 US ADP Non-Farm Employment Change. Exp. 134K.
• 13:30 US Unemployment Claims. Exp. 356K.
• 19:00 US FOMC Meeting Minutes.
• All Day US Total Vehicle Sales. Exp. 15.3M.

*Key releases are highlighted in bold
*All release times are GMT

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