Dollar stronger on fiscal cliff setback (Córdoba) - The dollar trades firmer and stocks lower on Friday as the failure of the US House to vote on a budget proposal contributed to caution across financial markets and benefited safe-havens as the USD and the JPY.

EUR/USD extended its pullback from levels above 1.3300 scored last Wednesday, and slid back below 1.3200 despite the latest string of US data on income, expenditures and durable goods orders came in stronger-than-expected.

"While the latest developments have not scuttled the possibility of a broader budget agreement being reached, the timing is now very tight and the margin for error even slimmer", says Nick Bennenbroek, Head of Currency Strategy, Wells Fargo Bank. "Further U.S. dollar strength and foreign currency weakness is possible with the uncertain backdrop likely to persist for at least the next few days".

Euro slips below 1.3200 amid cautious mood

The EUR/USD dipped below the 1.3200 mark on Friday and hit a 3-day low of 1.3165 weighed by the lack of progress in US fiscal cliff negotiations. With the cautious tone reigning in financial markets, the pair could see a deeper correction toward 1.3100 in the next sessions while movements could be exacerbated amid thin volume due to the Christmas holidays.

On the upside, EUR/USD needs to regain at least 1.3240 to ease the immediate pressure while a rally through 1.3300 would open the doors for a rise toward 1.3385 as immediate bullish target.

"From a short-term point of view, EUR/USD's sell off through the latter part of the week does leave a bit of a dent in the rally. But the underlying trend momentum in this market remains very strong and that should limit EUR weakness", says TD Securities team. "Indeed, there has not been much follow through below the 1.32 support area and the market remains inclined to buy EUR dips it seems".

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