EUR USD (1.2290) The impact of the looming ‘fiscal cliff’ in the US has been a common theme of market discussions in recent weeks. That the expiration of the Bush-era would be a drag on an already weak economy is clear; many observers fear an outright recession. Now, a new study by Ernst & Young has put some precise figures to the Damoclean sword. The consultancy estimates that output would fall 1.3 percent and over 700,000 jobs would be lost. For many traders though, this sounds like precisely the kind of outcome that Bernanke described as being necessary for the Fed to resume QE. The worse the prospects for the US economy appear, therefore, the better investors consider they are for asset prices. For the fourth consecutive trading day, the euro has demonstrated its remarkable ability to recover swiftly from a mid-session sell-off. We described this behaviour already in yesterday’s report, so short-term traders were certainly familiar with it. They may even have contributed to the dip-buying when the single-currency suddenly slumped yesterday on unconfirmed reports of another eurozone sovereign downgrade. However, as following earlier rebounds, the euro has still not been able to build on its apparent resilience. It still has not been able to challenge the very first good supply point, which remains at 1.2365. Only beyond there would we consider it stable in the nearterm.
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Deutsche Bank