Positive Fiscal Cliff Comment Fuels EUR/USD Reversal

Foreign currencies strengthened along with crude oil and gold after U.S. Senator Bob Corker said the final stages of negotiations to avert the fiscal cliff are “inconsequential”, hinting that a solution may be reached by the end of the day. 

The EUR/USD soared as the news triggered a massive short-covering rally during the thinly traded holiday shortened session. Prior to the intraday rally, the market had been treading water between 1.3199 and 1.3171 as traders appeared to be content with holding the Forex pair in a range. 

Technically, the EUR/USD found support on an uptrending Gann angle at 1.3176. This price was slightly above the last main bottom at 1.3158. A trade through this level would’ve turned the main trend to down on the daily chart. 

The GBP/USD also posted a solid gain on fresh short-covering. The Forex pair found support on an uptrending Gann angle at 1.6136. Based on the main range of 1.6306 to 1.6066, the first upside target was 1.6186 to 1.6214, however, the market drove right through this zone due to strong momentum. 

Today’s move was a surprise reaction to Senator Corker’s comments. The key as to whether the market believes what he is saying will be the intraday follow-through. Continuing to drive higher into today’s early close will set up the market for higher prices on Wednesday. The first targets are the two tops at 1.6306 and 1.6309. 

Volatility was highlighted during today’s February gold session. With the market opening under a cloud of uncertainty, gold rallied to $1669.40 before selling off to $1657.10. After Senator Corker’s news flash shocked the markets, gold rallied to $1666.90 before weakening. Although the market is likely to finish higher, there doesn’t seem to be a lot of support behind the move. This may be a sign that investors are pulling out of gold and moving into the more liquid Forex markets. 

Technically, February gold looks as if it is trying to build a support base between a pair of retracement levels at $1669.05 to $1638.15. Due to the recent sideways trading conditions, expectations are for a breakout to occur shortly. If a fiscal cliff solution fails to be reached then look for a breakout to the upside. If a compromise is reached then gold is likely to see renewed selling pressure. 

February crude oil bounced off of a key 50% level at $90.02, triggering a solid intraday short-covering rally. The move was triggered by positive fiscal cliff news. Regaining the Fibonacci level at $91.16 will be a positive development, but a move through the closing price reversal top at $91.49 will reaffirm the developing uptrend. 

Fundamentally, reaching a compromise regarding the fiscal cliff will likely mean that the U.S. will avoid a first quarter recession. This should help to hold crude old demand steady or may even increase demand which would then lead to a possible drawdown in inventory.