The EUR/USD pair fell during the session on Friday, only to bounce off of the 1.3150 level. This level has served as support over the last two weeks, and previously was significant resistance. This was the classic "breakout, pullback and retest for support" type of move that we see so often in the Forex markets, but we have not seen the follow through on the upside yet.
This is perhaps because of the so-called "fiscal cliff" situation in the United States. If the United States were to go into recession, this will put a serious dent into any of the risk appetite trades around the world. This would of course include this pair, which generally does well when the risk appetite is decent.
On the upside, I can see that the 1.33 level is offering significant resistance. When you look at the longer-term charts, you can see that there is quite a bit of noise above the 1.33 level going all the way to the 1.35 level. Because of this, I think that any move higher will more than likely be choppy, and will need some type of catalyst.
Possible catalyst
The possible catalyst that I see for pushing this pair higher would be some type of resolution to the “fiscal cliff” talks in the United States. Not only would this require some type of resolution, but would require some type of sound decision as well. A simple "kick the can down the road" type of agreement may not be enough to push markets higher.
The 1.3150 level has offered significant support, and if we can manage to get below that on a daily close it would indeed be bearish. However, I would feel much more comfortable shorting this pair under the 1.31 handle as I think this support level is a "zone" and not a line in the sand so to speak.
A daily close below the 1.31 handle, I think that we could fall as low as 1.29 in relatively short order. At that level, I see quite a bit of support for the Euro, and that might be about as far as we could fall in the short-term.
