For the past 2 months, and after bottoming at 1.2660, the EUR/USD has seen an increasing upside momentum that took the pair to a 1.3307 high past week. Retracement from such high was contained by the 38.2% retracement of the latest bullish leg, and the pair aims back higher standing now above 1.3200. So, what are the chances the pair may continue higher, and what the chances of a top in place and further falls from now on? 

Much of the answer will depend on the result of the US fiscal cliff negotiations this week. The country needs to reduce deficit, and needs huge tax increases or fiscal cuts, to reach its target. A delicate balance in between political forces needs to be solved this Friday, or the country will face next week, more than half a trillion dollars in tax increases and across-the-board spending cuts. The upcoming recession then could be the worst in the country. And Americans don’t want no more. 

In the meantime, Europeans are slowly restoring confidence in the common currency: the ECB OTM plan, the upgrade of Greece from S&P, and Spanish PM Rajoy claiming there’s no need to ask for a bailout, has saw yields differentials fall slowly but steadily. Don’t get me wrong: things are no good in Europe either, but there seems to be light at the end of the tunnel. 

Technically, the pair is set to continue advancing,  finding strong buying interest of retracements; market is selling safe havens gold and yen both for different reasons, but ending up buying euro in exchange. As per now, an extension above 1.3300 may see the pair extending to 1.3380 area, March 2012 monthly highs. Once above there is scope yes, to a continuation towards 1.3500 area. Risk to the downside is related with US fiscal cliff, and the panic selling of high yielders we may see if the country does not reach a deal: 1.3000 will then be a likely target, and once below 1.2745 comes next.

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