However, disappointing US data and comments from US Senate majority leader Harry Reid saying going over the fiscal cliff "looks like where we're headed", helped the greenback to trim losses during the American session while pressuring stocks in Wall Street.
“Expectations for the current round of budget talks have also been pared back, with initial hopes of a comprehensive agreement now seen as less likely, and an interim deal involving limited budget savings instead seen as a more realistic prospect”, says Nick Bennenbroek, Head of Currency Strategy at Wells Fargo Bank.
Euro retreats but holds above 1.3200
EUR/USD peaked at 1.3282 at the beginning of the NY session only to fall back to the 1.3200 area afterward as worse-than-expected US data weighed on investors’ sentiment. It was last trading at the 1.3225/30 zone, virtually unchanged since opening.
The 1.3200 area should offer immediate support for the cross followed by 1.3155, while below this latter the pair could accelerate towards 1.3100. On the other hand, a clear break above 1.3280 could sent the shared currency to retest its Dec 20 high of 1.3307, targeting the 1.3385 area then.
“Technically, EUR/USD remains well supported and on the cusp still of a further push up. That would perhaps require a quick resolution to the US cliff talks or a more negative assessment on the USD’s prospects (no safe-haven bid) if the discussions drag on”, says the TD Securities analyst team. “We see good support on dips to the mid/upper 1.31 area for now, with 1.3100/35 the key support zone”.
Meanwhile, the Wells Fargo team argues that the greenback’s decline perhaps reflects disappointment at limited progress in budget talks, but at the same time disappointment that is not severe enough to prompt broader financial market weakness and safe-haven buying of the US dollar. “The US dollar could soften further against most foreign currencies in what remains relatively quiet trading. The key exception could be the yen, which continues to soften against most currencies including the U.S. dollar as the new Japanese government pushes for an aggressive monetary and fiscal policy approach”, they add.