Renewed “Fiscal Cliff” Fears Lead to Risk Aversion
A setback in budget negotiations late last week generated fears that the US was closer to going over the “fiscal cliff” of automatic tax increases and spending cuts, which led to significant risk aversion before markets closed for the weekend. As a result, safe-haven currencies, like the USD and JPY, turned bullish. This week, low volatility in the marketplace is expected due to the Christmas holiday. Still, traders will want to pay attention to any developments in the US budget talks, as well as several pieces of significant US news. Thursday's CB Consumer Confidence and New Home Sales, followed by Friday's Pending Home Sales figures, all have the potential to create market volatility.
USD – Dollar Sees Gains amid Breakdown in Budget Talks
The safe-haven US dollar saw bullish movement against its higher-yielding currency rivals on Friday, following a breakdown in budget negotiations between Congressional leaders and President Obama. The news resulted in fears that the US was closer to going over the “fiscal cliff” of tax increases and spending cuts which threaten to bring another recession. The AUD/USD fell more than 80 pips over the course of the day, eventually trading as low as 1.0393, before closing out the week at 1.0402. The GBP/USD tumbled around 120 pips before finding support at 1.6150. The pair finished the week at 1.6169.
This week, traders should expect a low liquidity environment in the marketplace, as many investors will be on Christmas holiday. That being said, it should be remembered that seemingly random price shifts can occur unexpectedly during slow trading intervals. In addition, US home sales data, set to be released on Thursday and Friday, has the potential to create market volatility. Should the either the housing figures or CB Consumer Confidence report, also scheduled for Thursday, show gains in the US economy, the dollar is expected to go up as a result.
EUR – Euro Takes Losses Ahead of Slow Trading Week
Concerns that the US could slip back into recession following a breakdown in budget negotiations late last week led to risk aversion in the marketplace, which caused the euro to take losses throughout Friday's trading session. Against the US dollar, the common-currency fell close to 70 pips to trade as low as 1.3156, before a slight upward correction brought it up to 1.3181 to close out the week. The EUR/JPY fell more than 100 pips during the first half of the day, eventually reaching 110.60, before bouncing back to 111.04 during evening trading.
This week, a lack of European news due to the Christmas holiday means that euro pairs are likely to see low liquidity. Traders will want to watch out for sudden price shifts, which are known to occur for seemingly no reason. In addition, and developments in the US “fiscal cliff” talks are likely to impact the markets, with any positive developments likely to turn the euro bullish.
Gold – Shift to Safe-Haven Assets Boosts Gold
The price of gold increased by close to $10 on Friday, as investors, worried about the US “fiscal cliff” and a breakdown in budget negotiations, shifted their funds to safe-haven assets. The precious metal rose as high as $1659.54 an ounce during afternoon trading, after which a minor downward correction brought prices to $1656.87.
With any progress in “fiscal cliff” negotiations unlikely to occur until after the Christmas holiday on Tuesday, gold is unlikely to see significant volatility until the second half of the week. That being said, any announcements or rumors regarding US budget negotiations today could lead to erratic shifts in prices, with any positive developments likely to turn the precious metal bearish.
Crude Oil – “Fiscal Cliff” Concerns Send Oil Tumbling
The price of crude oil fell more than $2 a barrel during the first half of the day on Friday, following a breakdown in US budget negotiations that resulted in investors shifting their funds to safe-haven assets. The commodity traded as low as $87.93 during afternoon trading before bouncing back to $88.93 where it closed out the week.
This week, oil traders will want to pay attention to several potentially significant US indicators. Specifically, the New Home Sales, CB Consumer Confidence and Pending Home Sales figures all have the potential to boost oil prices if they come in above their expected levels.
The Williams Percent Range on the weekly chart has crossed over into overbought territory, signaling that a downward correction could occur in the near future. This theory is supported by the MACD/OsMA on the daily chart, which appears close to forming a bearish cross. Opening short positions may be best choice for this pair.
While a bearish cross has formed on the daily chart's MACD/OsMA, most other long-term technical indicators place this pair in neutral territory. Traders may want to take a wait and see approach, as a clearer picture is likely to present itself in the near future.
The weekly chart's Relative Strength Index has crossed over into overbought territory, indicating that a downward correction could occur in the coming days. Furthermore, the Slow Stochastic on the same chart has formed a bearish cross. Going short may be the best choice for this pair.
The Bollinger Bands on the weekly chart are beginning to narrow, signaling that a price shift could occur in the near future. Additionally, the Williams Percent Range on the same chart has dropped into oversold territory, indicating that the price shift could be upward. Opening long positions may be the best choice for this pair.
The Wild Card
The daily chart's Slow Stochastic has formed a bearish cross, indicating that a downward correction could occur in the near future. Furthermore, the Williams Percent Range on the same chart is in overbought territory. This may be a good time for forex traders to open short positions ahead of possible bearish movement.
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