EUR/USD: 1.2920The better than expected US jobs data on Friday, with NFP +146K and Unemployment dropping to 7.7%, was largely offset by a weaker Rts/Michigan Consumer Sentiment Index, and saw some choppy trade but largely left the Dollar in limbo at the end of the week.
The Euro finished at 1.2920, and with no apparent progress on the 'fiscal cliff' issue, the dollar is going to find it difficult to make any solid gains against a Euro that has plenty of negatives of its own and will find it increasingly difficult to maintain levels above 1.3000 as we head towards Christmas.
The Euro was not helped on Friday after ECB board member Jozef Makuch said that the bank may cut interest rates next year if the EU economy does not improve, and having downgraded the growth forecasts for what looks likely to be an economic contraction next year, this will continue to weigh on sentiment. Added to this, and probably more importantly the Bundesbank has cut its own forecast for German growth to 0.7% for 2012 from a June forecast of 1% and said growth next year was likely to be just 0.4%, compared with its earlier prediction of 1.6%.
Elsewhere, Mario Monti has announced he will stand down as PM of Italy once the next phase of the austerity measures are passed, which could lead to early elections in February. Happily, Silvio Berlusconi has announced his intention to ride to the rescue and to seek office again, which will delight the Italian electorate and the other EU leaders alike, and will do little to help the Euro or Italian bond yields.
From a technical perspective, the Euro on Friday, did pretty much as we had hoped and once it broke the Fibo support at 1.2950, it headed straight to the next support at 1.2895 and then continued to 1.2875 before bouncing back to the 1.2950 support-turned-resistance level, before drifting into the close. Given that the hourly charts are now oversold I suspect we may consolidate and possibly even squeeze up towards 1.3000 on Monday. However the 4 hour charts are pointing lower still so any short term strength looks likely to be relatively mild, but given that the 4 hour charts are also approaching o/s territory, the downside is likely to be rather slow. The points to watch are at 1.2875 (Fridays low), and then 1.2840 which should be strong as this is where the rising trendline from 1.2660 coincides with 61.8% Fibo level (1.2660/1.3126). Below this, 1.2770 would be the most likely target, (where the 100 DMA will cross the 200 DMA later this week - for the first time since Oct 2011, at about 1.3950) but remains out of touch at this point.
On the topside, back above 1.2950 would see sellers at 1.2970 before an attempt at 1.3000 and then on towards 1.3035 where minor downtrend resistance lies.
It looks to me as though any Euro strength is likely to be limited and probably temporary before further attempts to take us towards 1.2800, and it may well be that 1.2800/1.3000 contains it this week. The FOMC will be a key driver, with the chance of an increase in QE as Operation Twist comes to an end, but as always, the "fiscal cliff" negotiations, as well as the never ending discussion of the aid packages to Greece, Spain, Cyprus et al will continue to add their influence on the direction of the markets.
Liquidity over the next week or so is going to rapidly diminish and we may see some exaggerated moves, so keep stops in place!
Economic data highlights will include:
M: EU Sentix Investor Confidence (Dec)
T: German ZEW Survey - Economic Sentiment (Nov), Trade Balance (Oct)
W: German Consumer Price Index (YoY) (Dec), EU Industrial Production (YoY) (Oct), FOMC - Fed Interest Rate Decision/ Statement.
T: ECB Monthly Report (Dec), US Retail Sales (MoM) (Nov)
F: European Council meeting, EU Manufacturing/Services Flash PMI (Dec), EU CPI, US CPI.
