EUR/USD: Euro Advances as US Finally Avoids Falling Off Cliff

The Euro is believed to strengthen alongside the US dollar to begin the year on enhanced appetites for risk after the United States finally averted the fiscal cliff when the House of Representatives approved a bipartisan Senate deal earlier today. Meanwhile, preliminary economic reports from the Euro Zone for December are deemed to provide optimism that the economy is in for a slow yet steady recovery this year.

The US House passed legislation averting income tax increases for most US workers after Republicans seemingly abandoned their calls to attach spending cuts to the bill. In a vote of 257-167, the Republican-controlled House approved a bill that fulfills President Barack Obama’s re-election promise to raise taxes on top earners, effectively breaking a gridlock over how to head off $600 Billion in tax increases and spending cuts set to begin taking effect today. President Obama hailed the vote, saying that the law is just one step in the broader effort to strengthen the US economy while urging Congress to handle future budget issues with less brinksmanship.

With the deal, income tax rates will now rise on families earning more than $450,000 per year and individuals earning $400,000 annually. Low temporary rates that have been in place for the past decade will be made permanent for less-affluent taxpayers, along with a range of targeted tax breaks put in place to fight the 2009 economic downturn. The legislation will also continue expanded unemployment benefits and delay automatic spending cuts for two months. The plan marks a rare bipartisan agreement for lawmakers who have been trying for more than two years to reach an accord on taxes and spending, hurdling from deadline to deadline. With an economic catastrophe avoided for the mean time, risk-on trades are seen to bolster the single currency.

Updates from the Euro Zone economy are also foreseen to append the optimism. In Germany, price pressures are on the rise as the German Preliminary CPI is estimated to have increased by 0.7 percent in December, a considerable rebound from the 0.1 percent dip recorded in November. The gain is potentially the largest since February 2012, suggesting a revival in economic activity in the Euro region’s largest economy. Meanwhile, the Italian Manufacturing PMI is projected to rise from 45.1 points to a grade of 45.4 in December, indicating a slower contraction. As the markets look intent on taking on more risk, a long position is advised for the EUR/USD trades today.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.