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Home »Week Highlights » MONDAY DECEMBER 31: FX & Gold – weekly outlook – December 31 – January 04: ‘Fiscal cliff’: there’re two sides of the coin
ARTICLE: Today's Senate gathering is the last ditch effort towards reaching an understanding on fiscal issues or else a series of tax increases and government spending cuts will come into effect on Tuesday, January 01. Even if the legislators are able to successfully negotiate a fiscal deal there will be a big hitch, as negotiators are required to obtain approval through voting in the house - a difficult proposition though.

There are two sides of the coin; reaching an understanding on fiscal cliff will ease global pressure on riskier asset, but a deadlock will lead to a rush by investors/traders for safe haven liquid US Dollar that could destabilise global financial market.

Obama cutting short his vacation to join negotiations is surely an effort aimed at avoiding fiscal cliff. It is not known whether there going to be a deal before December 31st or will it go over the cliff and if it goes over the cliff, will the congress opt for 2-weeks grace period and make a pledge to announce?

This will be known in next few hours, but then this type of disappointing news will have a negative impact on the global financial market that could witness a sharp selloff of currencies, stocks and gold.

Meanwhile, there are some important economic data due this week. On Monday, HSBC's Manufacturing Purchasers Index (PMI) will be released and on Wednesday, NBS (PMI) China Federation of Logistic Purchasing will be announced - a strong indications that about the health of Chinese economy. Both are important Chinese indicators, as China is one of the major driving forces to provide clue about the global demand, particularly at a time when signs of economic growth in Euro-zone region are depressing. The Eurozone economy has so far shrunk for six-straight months.

Similarly, some of the major US economic data are expected that will provide better picture about the US economy. On Wednesday, there are quite a few announcements, out of which PMI is the key data that will guide about business condition in manufacturing sector.

On Thursday, US Automatic Data Processing (ADP) Non-Farm Employment Change data is a helpful indicator that measures the change in the number of employed people in the US that will be followed by US Unemployment claims data, which probably fell sharply due to Christmas holidays and is expected to be well again due to improving job condition. But Thursday's FOMC minutes may have a larger impact on the market, as it will provide a better sense of the FED's last November's dovish approach as in its FOMC meeting, the Fed opted for QE4 by announcing that it would purchase an additional USD 45 billion US bonds.

However, on Friday a barrage of US economic data will be released, but all eyes will be on US Unemployment Rate data.

GOLD @ $ 1655.60 = Gold is stuck in a narrow range struggling to move beyond $ 1670 levels. Strong US data was surely one factor that was holding gold to make gains with selling interest seen on its rise. Fiscal cliff and year-end squaring are the big factors that have thinned down the volume. My perspective on fiscal talk failure differs. Like others I do not see gold surging on safe haven demand on fiscal talk failure that will reduce economic activity which should lead US economy to recession. Because we have to take a note of the fact that fiscal talk failure also means a liquidity crunch due to tax hike and spending cut means reduction in economic activity, which should be bad news for gold bulls. However, surprise agreement will bring bulls back in the ring. But later in the week, the Fed's FOMC minutes and US unemployment report could help gold test the support and resistance level.

As long as $1675-80 levels hold, risk is for a test of $ 1630-35. A break of this level will encourage for a test of $ 1590 or $ 1570. However, a push beyond $ 1690 will suggest gold is ripe for another bull run;

EURO @ 1.3215 = As long as Euro fails to move beyond 1.3350, see risk for more losses. A break of 1.3110 will encourage for 1.3020. I will not be surprised if a fall is extended to 1.2960. Range for the week: 1.2920 - 1.3390;

GBP @ 1.6153 = Cable came under pressure due to poor economic data pointing weakness in the UK economy. The levels to watch is 1.6280, as long as it holds below, see risk for deeper correction, a break of 1.6040 will encourage for a test of 1.5920-40 zones. Range for the week: 1.5920-1.6310;

JPY @ 85.88 = We may have seen the top around 86.60. However, only a break of this level could see a push towards 86.95. A suspect break of 85.10 could see a bigger fall, as failure of fiscal talk may provide a reason for deeper correction. Probably a test of 83.85. Range for the week: 83.50 - 87.20;

AUD @ 1.0371 = An upside should be capped below 1.0480-90 levels as a break of 1.0275 could introduce a more bearish spell for the Australian currency; it could bounce back from 1.0250 or fall could extend towards 1.0180 zones. Range for the week: 1.0150 -1.0520.

Copyright Business Recorder, 2012


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