Renewed “Fiscal Cliff” Fears Lead to Risk Aversion
A setback in budget negotiations late last week generated fears that the US was closer to going over the “fiscal cliff” of automatic tax increases and spending cuts, which led to significant risk aversion before markets closed for the weekend. As a result, safe-haven currencies, like the USD and JPY, turned bullish. This week, low volatility in the marketplace is expected due to the Christmas holiday. Still, traders will want to pay attention to any developments in the US budget talks, as well as several pieces of significant US news. Thursday’s CB Consumer Confidence and New Home Sales, followed by Friday’s Pending Home Sales figures, all have the potential to create market volatility.
USD – Dollar Sees Gains amid Breakdown in Budget Talks
The safe-haven US dollar saw bullish movement against its higher-yielding currency rivals on Friday, following a breakdown in budget negotiations between Congressional leaders and President Obama. The news resulted in fears that the US was closer to going over the “fiscal cliff” of tax increases and spending cuts which threaten to bring another recession. The AUD/USD fell more than 80 pips over the course of the day, eventually trading as low as 1.0393, before closing out the week at 1.0402. The GBP/USD tumbled around 120 pips before finding support at 1.6150. The pair finished the week at 1.6169.
This week, traders should expect a low liquidity environment in the marketplace, as many investors will be on Christmas holiday. That being said, it should be remembered that seemingly random price shifts can occur unexpectedly during slow trading intervals. In addition, US home sales data, set to be released on Thursday and Friday, has the potential to create market volatility. Should the either the housing figures or CB Consumer Confidence report, also scheduled for Thursday, show gains in the US economy, the dollar is expected to go up as a result.
EUR – Euro Takes Losses Ahead of Slow Trading Week
Concerns that the US could slip back into recession following a breakdown in budget negotiations late last week led to risk aversion in the marketplace, which caused the euro to take losses throughout Friday’s trading session. Against the US dollar, the common-currency fell close to 70 pips to trade as low as 1.3156, before a slight upward correction brought it up to 1.3181 to close out the week. The EUR/JPY fell more than 100 pips during the first half of the day, eventually reaching 110.60, before bouncing back to 111.04 during evening trading.
This week, a lack of European news due to the Christmas holiday means that euro pairs are likely to see low liquidity. Traders will want to watch out for sudden price shifts, which are known to occur for seemingly no reason. In addition, and developments in the US “fiscal cliff” talks are likely to impact the markets, with any positive developments likely to turn the euro bullish.
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