The first quarter of 2013 should be a fairly active one for the EUR/USD pair. There are a lot of different ways that this situation can unfold, but we have so many moving parts presently that it really needs to be broken down into various scenarios.
Currently, the United States is dealing with what is known as the “fiscal cliff.” In layman's terms, this is essentially a set of automatic tax increases as well as spending cuts that go into effect at the end of the year if Congress cannot come up with some type of spending compromise. While this is exactly what the United States needs to do, the amount of spending cuts and tax increases would almost certainly throw the economy into a recession. The idea is that the US needs to do this anymore gradual manner, and not in such a brutal fashion.
On the other side of the Atlantic, you have the never-ending European debt issue. It seems like we've been talking about this for about 40 years now, and the reality is that several of the European nations need to default. However, as long as there is "financial engineering" possible, the banks will do what they can to keep their balance sheets much better looking than reality would dictate. Is because of this that we keep going back and forth with the European problem, and see such wild gyrations in this currency pair.
In a nutshell, we have two very sick currencies fighting with each other.
Expect more volatility
I really hate to put this in writing, but you can expect more of the same. The next three months will see nothing short of an emotional roller coaster for this currency pair. Currently, the biggest thing that can move this pair would be whether or not Congress can come together and make some type of compromise. Personally, I believe that they will not get everything together between now and the end of the year. This would essentially throw the US economy over the cliff, but shortly thereafter things would be fixed. Remember, all of these things can be fixed recto actively, and I believe that will be what happens. Essentially, we could have a sudden plunge in this currency pair as people run towards the safety of US treasuries and a world of uncertainty. However, this will more than likely just be another knee-jerk reaction that will be turned around in the end. I should say however, that if we do get some type of serious agreement, this would be very bullish for the Euro as most investors would be looking to put a more "risk on" trade into the market.
Also, let's not forget the European debt issues that will continue. After all, nothing's really been fixed other than the European Central Bank admitting that it willing to buy peripheral that if the countries ask for it. This would include the Spanish, Italian, Irish, and Greek debt markets, and therefore is essentially the same thing as the ECB printing Euros. After all, they simply present few electronic keystrokes, and suddenly bonds are purchased out of thin air. With that being the case, the Euro will have a bit of a weight around its neck against most currencies. At times, it will be this way against the US dollar also.
Over the majority of the fourth quarter, we have seen this pair bounced around between the 1.3150 and 1.27 handles. I suspect that we will see similar price action, but with a slightly upward bias. I do not see this currency pair be able to break above the 1.35 level anytime soon, and do not see the likelihood of a break down below 1.25 either. Granted, this is a 1000 pip area, but I do believe that we will essentially move back and forth the entirety of the quarter. In a nutshell, this is essentially calling for a repeat of Q4.
The biggest problem I see above the 1.3150 handle originates at the beginning of 2012. You can see that there is a massive descending triangle up in that general vicinity that reached the 1.35 handle. We have broken into it somewhat as we have recently as 1.3150, but I cannot help but think that there is quite a bit of resistance above that area going until we get to 1.35. If we do manage to break above the 1.35 level however, I believe that this pair will actually skyrocket.
My suspicion is that you can probably count on a range closer to 1.30 at the bottom, and 1.35 of the top. I do believe that we will make an attempt to break out higher, and this we based upon the idea of the Federal Reserve expanding its quantitative easing further. The jobs number in the United States continues to be somewhat suspect, considering that most of the "gains" are made by people leaving the labor force.
With more quantitative easing will come a weakening of the US dollar, and we should see the Euro rise as a result. However, this will not be the cleanest pair to play that particular dynamic as the European Union has plenty of its own problems. Again, I suspect that we will see extreme choppiness with a slightly upward bias.
