Risk Taking Returns amid Renewed Push for US Budget Deal
Higher-yielding currencies and commodities saw bullish movement yesterday, as US lawmakers prepared to renew budget negotiations before the “fiscal cliff” of tax increases and budget cuts go into effect at the beginning of the year. Today, in addition to any developments in the budget negotiations, traders will want to pay attention to the US Unemployment Claims, CB Consumer Confidence and New Home Sales figures. Should any of the figures come in better than their predicted results, commodities like crude oil could see additional upward movement today.
USD – Progress In “Fiscal Cliff” Talks Could Drive Dollar Lower Today
The dollar took losses against its higher-yielding currency rivals yesterday, as hopes that US lawmakers will be able to reach a deal to avoid the “fiscal cliff” led to risk taking in the marketplace. Additionally, a report signaling growth in the US housing sector boosted riskier assets against the safe-haven greenback. The USD/CHF fell more than 40 pips during the European session, eventually reaching as low as 0.9117. The GBP/USD gained some 35 pips during mid-day trading before peaking at 1.6163.
Today, traders can anticipate significantly more volatility in the marketplace, as US Congressional leaders and President Obama return from the Christmas holiday to try and reach a budget agreement to avoid the upcoming “fiscal cliff”. Any indication that a deal is closer to being reached will likely lead to further risk taking among investors, which could weigh down on the safe-haven USD. Additionally, traders will want to note the results of the US Unemployment Claims, CB Consumer Confidence and New Home Sales. Positive news could boost riskier currencies against the dollar.
EUR – Risk Taking Leads to Significant Gains for Euro
The euro shot up against several of its main currency rivals yesterday, as positive US news combined with low liquidity led to exaggerated movements in the marketplace. The EUR/USD advanced more than 70 pips during the European session, eventually trading as high as 1.3253, before a slight downward correction brought the pair to 1.3245. Against the British pound, the common-currency gained some 25 pips to trade as high as 0.8196.
Euro traders will want to focus on US budget talks today, which are set to restart following the Christmas holiday. Time is running out for a deal to be reached before automatic spending cuts and tax increases threaten to send the US back into recession. The euro will likely be able to extend its bullish momentum if there are any indications that the budget crisis is closer to being resolved. Conversely, if the current impasse in negotiations continues, investors may shift their funds to safe-haven assets.
JPY – Yen Tumbles as New Prime Minister Takes Office
The yen took significant losses across the board yesterday, as speculations that the new Japanese Prime Minister will advocate for new monetary easing measures weighed down on the currency. The USD/JPY shot up to 85.46 during early morning trading, the pair's highest level since April of 2011. The EUR/JPY gained close to 60 pips during the European session to reach 113.12, a 16-month high.
Turning to today, analysts are warning that the yen is unlikely to recoup its recent losses unless risk aversion returns to the marketplace. If the deadlock in US budget negotiations continues today, nervous investors may once again shift their funds back to the safe-haven JPY.
Crude Oil – Crude Oil Gains Close to $2 during Slow News Day
The price of crude oil was able to gain close to $2 a barrel during mid-day trading yesterday, as a slow news day led to erratic price shifts in the marketplace. Additionally, better than expected US housing data led to risk taking in the marketplace. The commodity was traded above the $91 level by the end of the European session.
Today, oil traders will want to pay attention to a batch of US news, including this week's Unemployment Claims figure, along with the CB Consumer Confidence and New Home Sales reports. If any of the data comes in better than expected, crude could extend its gains during afternoon trading.
The Bollinger Bands on the weekly chart are beginning to narrow, indicating that a price shift could occur in the near future. Furthermore, the Williams Percent Range on the same chart has crossed over into overbought territory, signaling that the price shift could be bearish. Opening short positions may be the wise choice for this pair.
Most long-term technical indicators place this pair in neutral territory, which makes a definitive trend difficult to predict at this time. Traders may want to take a wait and see approach for this pair, as a clearer picture is likely to present itself in the near future.
The Slow Stochastic on the weekly chart has formed a bearish cross, indicating that this pair could see downward movement in the coming days. Furthermore, the Relative Strength Index on the same chart has crossed over into overbought territory. Going short may be the wise choice for this pair.
The weekly chart's Williams Percent Range has dropped into oversold territory, signaling a possible upward correction for this pair in the coming days. This theory is supported by the MACD/OsMA on the daily chart, which appears close to forming a bullish cross. Opening long positions may be the wise choice for this pair.
The Wild Card
The daily chart's Slow Stochastic has formed a bullish cross, indicating that an upward correction could occur in the near future. Furthermore, the Williams Percent Range on the same chart has crossed over into oversold territory. This may be a good time for forex traders to open long positions, ahead of possible upward movement.
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