Strong Fiscal Cliff Warning Drives U.S. Dollar Higher

A sharp reversal to the upside in the U.S. Dollar helped drive down the Euro, British Pound and crude oil, but gold remained steady. The dollar rose sharply after Senate Majority Leader Harry Reid said the U.S. may fall off the so-called fiscal cliff, citing a recession caused by spending cuts and tax increases as the main reason. 

 Earlier in the session, the EUR/USD surged, challenging the 8-month high reached last week at 1.3308. Today’s price reversal demonstrates how fast the market can turn and how susceptible it is to the growing concerns in the U.S. regarding its economy. 

Technically, the EUR/USD formed a new bottom at 1.3158, up from 1.2876. A trade through 1.3158 will turn the main trend to down and could trigger the start of a reversal into 1.3092 to 1.3041 over the near-term. 

The GBP/USD also reversed to the downside in a dramatic fashion after retracing its recent break from 1.6306 to 1.6101. The subsequent break took out uptrending Gann angle support that had been holding since November 15. The break through the angle at 1.6116 was a clear sign that sentiment was shifting to the downside. Although the first target at 1.6066 is likely to be reached today or tomorrow, the momentum created by the reversal suggests that a move to 1.6001 is very likely. 

Fundamentally, like the Euro, the stronger dollar exerted its force on the Sterling. Many traders suspect that a U.S. recession will also trigger a global slowdown in growth, making the U.K. economy vulnerable. 

Technical as well as fundamental factors contributed to the lower close in February crude oil after Wednesday’s volatile rally. Today’s prices reached a major Fibonacci retracement level at $91.16 before selling off early on profit-taking. It wasn’t until Harry Reid made his negative comment about the fiscal cliff that sellers arrived to push the market lower. Investors should watch for a test of $90.00. A failure at this price level could drive the market down to $88.00. 

Despite the stronger U.S. Dollar, February gold remained relatively strong inside of a major retracement zone at $1669.05 to $1638.15. A breakout about $1638.15 would signal the start of a move back to $1700.00 while breaking $1638.15 will mean a resumption of the downtrend. Oversold conditions are contributing to the formation of a support base but it may be the uncertainty creeping back into the market that is making this commodity an attractive investment. Investors may feel that since all major economies and currencies are susceptible to a recession that gold may be the safest investment at this time.