Fiscal Cliff Concerns Bolster EUR/USD

As the US holiday approaches, concerns are now shifting to an inevitable 25th hour decision by Congress, over the Fiscal Cliff. With party members now on holiday through December 27th, there is just a little more than a week left before the activation of $600 billion in tax increases and spending cuts. The notion is bolstering the Euro against the US dollar, above support at 1.3160.

Still at odds, political leaders remain deadlocked in several specific areas. Particularly, US President Barack Obama and House Speaker John Boehner remain separated by:

Tax Increases on Top Earners. Although Republican concessions have been made to include those making $1 million or more, Congressional Democrats still want to see high income earners pay their share of taxes. At first, this included anyone earning above $250,000. However, President Barack Obama has increased it to those making a minimum of $400,000.

Entitlement Changes. This would include an increase in the Medicare eligibility age, by two years, and a change to the current method that the Social Security Administration uses in calculating living standards.

Debt Ceiling. This has become a hot topic over the last week as Treasury officials have noted a likely test of the US debt ceiling in the beginning of next year. Already bumping up against the $16.4 trillion limit set at the beginning of 2012, the limit will likely have to be extended at the end of February or the beginning of March. Republican leaders want to debate it, while Democratic leaders want to temporarily suspend negotiations for at least two years – giving Democrats the power to extend the ceiling.

As long as negotiations continue, the EURUSD will remain supported in the near term as the extension in indecision is a bad thing for the US dollar. This is especially true given anticipation that both sides are expected to be working through New Year’s eve.

Ultimately, the current fundamental situation will place emphasis on the 1.3300 round figure barrier in EURUSD. A break above the level would bolster an advance on the 1.3484 February 29th session high.
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