Euro Lags On Growth Concerns Despite Risk Rally

The euro is notably weaker than other major currencies except the Japanese yen and Swiss franc even though the markets are generally blessed with risk appetite. Indeed, EUR/USD failed to take out 1.33 level yesterday and is now back trading at around 1.31 at the time of writing. A key factor of the euro's weakness is the worries on growth, in particular after a string of business sentiments data showed risk on continuing recession in Q4, which would extend to Q1.

Also, the supposed strongest economies in Germany and France aren't immune. And there are talks that ECB could be forced to take additional easing measures in 2013 to boost growth. And indeed, judging from the price actions, the euro could be somewhat viewed as a funding currency for carry trade for higher yield currencies.

Technically, EUR/AUD failed to take out 1.2823 resistance and the reversal now opens up deeper fall for at least a test on 1.2159 support in the near-term. EUR/CAD should have least made a short-term top at 1.3185 and is heading back to 1.2714 support in the near-term. Even EUR/GBP showed sign of reversal and is heading back to 0.8 psychological level. The breach of 1.3216 support in EUR/USD suggests that deeper decline is underway but we'd expect strong support inside 1.2876/3126 support zone, probably around 1.3 psychological level, to contain downside. Hence, in case of further risk rally, we'd tend to avoid buying euro.

While the US fiscal cliff issue is now passed, focus would possibly turn to so called "debt ceiling" in the coming weeks. Republicans have already made it clear that they will press for dramatic spending cuts in exchange for raising the $16.4T federal debt ceiling. Such a ceiling has already been hit and it's estimated that the "extraordinary measures" for funding federal operations could only buy around two months time for negotiations. House Speaker Boehner is insisting that any increase in debt ceiling should be offset by an equivalent spending cut.

Meanwhile, President Obama proposed that the president could unilaterally raise the limit unless being overridden by two-thirds majority in Congress. Treasury Secretary Geithner even goes further and suggested eliminating the debt ceiling.

On the data front, China non-manufacturing PMI improved to 56.1 in December. Swiss KOF leading indicator is expected to drop to 1.4 in December, SVME PMI is expected to drop to 48.3 in December. German unemployment is expected to be unchanged at 6.9% in December. UK PMI construction is expected to rise slightly to 49.5 in December and any upside surprise here could trigger another sell-off in EUR/GBP. From the US, employment data will be a major focus with Challenger job cuts, ADP employment and jobless claims featured. The Fed will also release FOMC minutes.