The Fiscal Cliff weighs on EU Crisis

by Ed Liston · November 13, 2012

The Fiscal Cliff weighs on EU Crisis

With the EU searching for any foothold, the U.S. looks poised to follow the Europeans into the fiscal abyss. The U.S. election season is over and the markets have refocused their attention to the looming “fiscal cliff”. Essentially the Bush tax cuts are set to expire along with sequestration cuts coming online. Both at the same time are almost certainly going to toss the U.S. back into recession.

Europe’s continual game of ‘we have to pay for this?’ is also rattling the markets. Greece’s ongoing saga of the 120% debt target has been delayed to 2022. Juncker may not think it is a joke, but the market certainly does.

The scenarios for the fiscal cliff are not promising. Undoubtedly a deal will get done, but the shape of it remains to be decided. The brinkmanship over the debt ceiling fight is sure to make a return as parties jostle for position. Beltway wisdom has the Democrats in a better position to get revenue increases, the new buzzword for tax increases. The GOP pundits have already signaled they are willing to give on the wealthy tax increases in return for broader tax and entitlement reform.

What is almost a certainty is that the can will be kicked in the lame duck session. Small extensions of the status quo are the likely outcome before Christmas. Once the new Congress is seated the real fight will begin. Republicans still reeling from their losses last week will use their control over the House to try and force some sort of a grand bargain.

Meanwhile in Europe, one has to wonder how many cliffs they can fall off of until they cease to exist. Just when you haven’t heard anything on Greece in a few weeks they pop up and yep, they want money. They are like that delinquent family member that always asks to borrow cash.

Toss in Spain’s fiscal woes, Italy’s struggling economy and you have all the trappings of a continual bailout. When they used to talk of a moral hazard in 2008, you have to wonder if they ever envisioned this?

High Impact Indicators on Watch

USD Advance Retail Sales (Wednesday)
USD Producer Price Index (Wednesday)
USD Fed Releases Minutes from Oct 23-24 FOMC Meeting (Wednesday)
EUR German Gross Domestic Product (Thursday)
EUR Euro-Zone Consumer Price Index (Thursday)
USD Consumer Price Index (Thursday)

FOREX Insights

The EUR.USD has been a bearish play for day traders over the last few weeks as the market is coming off of the “hopium” high injected by Draghi back in the early part of August. Will this trend continue? The underlying question for traders right now is which side of the fence to be on when this thing comes down. Two failing economies makes a long term EUR.USD play difficult to decipher.

On the daily chart the technical story looks intriguing at best. The Relatives Strength Index (RSI) is oversold, the trend has been riding the bottom Bollinger band for just over a week and we are seeing a possible “death cross” in the moving averages. We will likely see a continued decline in the EUR.USD, but caution is key as we approach the 50% retracement level.

Your currency analyst,

Justin Burkhardt

Disclaimer: I have no positions in any of assets mentioned, but may initiate a (long or short) position in the EURUSD over the next 72 hours

The Fiscal Cliff weighs on EU Crisis