Forex: U.S. Fiscal Deal Fuels Risk Appetite- EURUSD Losing Momentum

DailyFX

Talking Points

  • U.S. Dollar: Fiscal Deal Fuels Risk Appetite, ISM Manufacturing On Tap
  • Euro: Maintains Range-Bounce Prices, RSI Divergence In Focus
  • British Pound: Hits Five-Month High As U.K. Manufacturing Rebounds

U.S. Dollar: Fiscal Deal Fuels Risk Appetite, ISM Manufacturing On Tap

The greenback struggled to hold its ground on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 10,000, and the reserve currency may weaken further over the next 24-hours of trading should the Federal Reserve continue to strike a dovish tone for monetary policy.

Indeed, market participants increased their appetite for risk as the U.S. Congress struck a deal to avoid the ‘Fiscal Cliff,’ and the rise in trader sentiment may gather pace over the remainder of the week should the Federal Open Market Committee (FOMC) Meeting Minutes fuel speculation for additional monetary support.

After expanding the open-ended asset purchase program to $85B/month, the Fed may keep the door open to ease policy further amid the ongoing weakness in the labor market, but we may see the 2013 FOMC strike a more neutral tone as the economic recovery becomes more broad-based. As the ISM Manufacturing report is expected to show a rebound in business outputs, a positive development may curb bets for additional monetary support, and we may see the greenback regain its footing ahead of the highly anticipate U.S. Non-Farm Payrolls report as the fundamental outlook for the world’s largest economy improves.

Euro: Maintains Range-Bounce Prices, RSI Divergence In Focus

The Euro maintained the range-bound price action carried over from the previous year as the EURUSD fell back from an overnight high of 1.3292, and the pair appears to be carving out a near-term top ahead of the European Central Bank (ECB) interest rate decision on tap for next week as the Governing Council carries its easing cycle into 2013.

There’s speculation that the ECB will continue to shore up the real economy as the region faces a deepening recession, and we may see the central bank lower the benchmark interest rate further over the coming months as the headline reading for inflation is expected to slip below the 2% target this year. As the debt crisis continues to drag on the euro-area, we should see central bank President Mario Draghi preserve a cautious tone in 2013, and the single currency remains poised to face additional headwinds over the near-term as growth and inflation falters.

Beyond the fundamentals, the technical point to a near-term correction for the EURUSD as the relative strength index approaches overbought territory, and we will be keeping a close eye on the oscillator as there appears to be a bearish divergence taking place.

British Pound: Hits Five-Month High As U.K. Manufacturing Rebounds

The British Pound extended the advance from earlier this week, with the GBPUSD climbing to a fresh yearly high of 1.6341, and we will maintain a bullish outlook for the sterling as the fundamental outlook for the U.K. improves.

As a U.K. Manufacturing rebounds in December, the bright signs coming out of the economy should keep the Bank of England (BoE)on the sidelines, and the central bank looks poised to adopt a more hawkish tone for monetary policy as the Monetary Policy Committee sees above-target inflation over the next two-years. In turn, we should see the BoE switch gears in 2013, and the central bank may start to discuss a tentative exit strategy in an effort to balance the risks surrounding the region.

As the GBPUSD finally makes a meaningful push above the 1.6300 figure, we should see the pound-dollar continue to retrace the decline from back in April (1.6744), and the sterling may outperform this year as the BoE slowly moves away from its easing cycle.

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

15:00

10:00

Construction Spending (MoM) (NOV)

0.60%

1.40%

USD

15:00

10:00

ISM Manufacturing (DEC)

50.40

49.50

USD

15:00

10:00

ISM Prices Paid (DEC)

50.80

52.50

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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