Euro Hangs in the Balance as Fiscal Cliff Approaches

“I think we have the worst behind us.” German Finance Minister Wolfgang Schaeuble said Thursday.

Fundamentally, there’s evidence the euro could continue to be bullish throughout 2013. Euro doomsday predictions fell short as Spain, Greece, and Italy all survived 2012.

Finance Minister Wolfgang’s “the worst behind us” statement presumably boosted Euro sentiment as well as complimented ECB President’s July promise to do “whatever it takes” to save the euro.

Taking a look at the technical side of the Euro: a EURUSD 1.31 break out into the 1.32 resistance level is a substantial move. Assuming it closes above the 1.325 level Friday, the EURUSD will have a beautiful long signal. EURJPY is hitting 2011 levels at 113 while the EURGBPbreaks through 6+ month highs.

If we are just analyzing the Euro, things are looking fine and dandy, but let’s zoom out.

Fiscal Cliff’s Influence on the Euro

Zooming out we are entering a less concrete area of analysis. We’re going to take a look at two possible scenarios of the Fiscal Cliff:

Risk Aversion for the U.S.Dollar
Risk Aversion takes place when people invest in “safe havens” during a crises. Since the U.S. Dollar is a safe haven currency, people invest in it even when the economy is ugly. I the 2008 crash, we saw this take place as the value of the U.S. Dollar rose exponentially against the Euro. With the Fiscal Cliff situation , it is likely that we will see a measure of risk aversion take place.

Euro rise and Dollar Collapse
In spite of housing market news, the U.S. economy’s sentiment is not good, especially with the Fiscal Cliff scenarios constantly being played on the media. Sentiment what people think about the market. Sentiment is why resistance and support work. If sentiment is awful enough, central banks and other major market movers may take funds out of the U.S. Dollar. In result of the recent Euro news, the Euro may be their choice of investment instead of the U.S. Dollar. I’m not saying the Euro will be the new safe haven by any means, but in the short term until Washington gets a hold on fiscal matters, the Euro may be a good choice.

Investing is always risky, especially with Forex Trading. Don’t invest money that you can not afford to lose. Be wise and get in at the right time. One approach to this situation is to find the established trend of what the fiscal cliff causes and then enter in on the trend. The effectiveness of this scenario can be seen in the 2008 crash. Visit this link to see the illustration.

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