USD under broad based pressure

There remains a great deal of angst in markets due to the lack of resolution to the US fiscal cliff, which is putting pressure on overall market sentiment as reflected in the multi day rise in the VIX fear gauge over recent days. The fact that both the US administration and senior Republicans are giving little ground in discussions suggests a deal is not in sight although the pressure for compromise will intensify as year end approaches.

The news in Europe is a little better as reflected in the narrowing in peripheral bond yields. There will be little directional influence on markets today, with trading likely to be subdued ahead of the US jobs report on Friday, with any news on the fiscal cliff also closely watched.

The USD continues to come under broad based pressure, with the USD index having lost around 2% of its value since 16 November. The lack of traction in terms of resolving the fiscal cliff and the weaker US data this week, namely the November ISM manufacturing index have weighed on the currency.

How much of the USD move is due to position adjustments as year end approaches fast or renewed confidence in the EUR is debatable but it is clear that the USD looks like it will end the year in a bad state. The ADP jobs report today may give further direction but it seems unlikely that pressure on the USD will abate ahead of the November payrolls data on Friday.

While the EUR’s gains are beginning to look overdone, the momentum for the currency continues to be to the topside as short positions continue to be covered into year end. The EUR’s appreciation is taking place hand in hand with the drop in peripheral bond yields. A positive reception for Greece’s debt buy back as well as Spain’s request for aid for its banking sector has also helped the currency.

Rumours of a German debt downgrade have done little to diminish the EUR’s appeal. An upcoming meeting of EU finance ministers next week ahead of the EU leaders’ summit to try and make some progress towards banking supervision is also hoped to deliver some good news. A test of sentiment will come from a Spanish bond auction today but this is unlikely to be much of an obstacle to the EUR. Near term EUR/USD resistance is seen around 1.3172.

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