EUR/USD gained more than one big figure early in Asia as investors enjoyed the political agreement to ‘solve’ the fiscal cliff in the US. In line with global positive sentiment on risk, EUR/USD jumped from the 1.32 area to the 1.33 area. However, in thin markets it was too early to start a clear trend-move and EUR/USD returned to the 1.3255 area. European (equity) markets reacted also enthusiastic, but EUR/USD failed to set new highs North of the 1.33 mark. So, the key 1.3308 area (Dec top) stayed out of reach. Sentiment on risk remained constructive even as the final EMU manufacturing PMI was revised slightly lower from the preliminary reading. However, this was not a big issue for EUR/USD traders. At the same time, one can raise the question whether the agreement on the fiscal cliff should be that negative for the dollar. The risk-on, risk-off market pattern is one factor. At the same time, avoiding a sharp setback in US growth might also be a positive for the dollar. EUR/USD hovered up and down mostly in the upper half of the 1.32 big figure. US equities also succeeded a strong start of the new year, but this didn’t cause any additional gains in EUR/USD anymore. The US ISM of the manufacturing sector returned above the 50 boom-or-bust level, but the report was too close to consensus to give currency trading a clear direction. US equities remained well bid, but at the end of the European trading session, the euro faced growing selling pressure. We didn’t see a clear driver for this move. After the December gains, markets were probably positioned euro-long going into the last phase of the fiscal cliff talks. Yesterday’s move might be considered as profit taking on short-term euro longs. Repositioning in other euro cross rates (EUR/GBP, EUR/JPY) might have played a role to. EUR/USD closed the session at 1.3186, little changed from the compared to a 1.3193 close on Monday evening.
We retain from yesterday’s session that the EUR/USD pair failed to gain from risk-on sentiment. It is too early to conclude that the dollar will be more driven by positive news from the US and that the risk-on/risk-off paradigm is losing its grip on markets. That said, we continue to look for signs of a more classic, cyclical reaction of the dollar to US eco data. For now, this is nothing more than an option.
We look out whether yesterday’s disconnect between EUR/USD and equities will be continued. There is still no clear trading pattern for trading on the major currency cross rates, but yesterday’s rejected test of the topside in EUR/USD suggests that some further profit taking on EUR/USD longs might be in store.