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Foreign Exchange

Euro breaks higher as US debt ceiling talks waver

The failure of the US Congress to reach a deal on raising the US debt ceiling weighed heavily on dollar sentiment Tuesday. EURUSD opened at 1.4501 in London, while traders reported widespread dollar selling overnight, with support at 1.4390/1.4310-20 and resistance at 1.4520.

Republicans have said they will support a modest rise in the debt ceiling into 2012, using an initial $1.2 trillion in savings over the next 10 years. President Obama’s plan is for a $2.7 trillion deficit reduction over 10 years, and he has promised to veto any plan that doesn’t extend the borrowing limit past next year’s election, into 2013. That places the US in an awkward position because Standard & Poors says that it wants to see a $4 trillion reduction in the US deficit over 10 years to ensure that the US maintains its AAA rating. Traders say heavy dollar selling in Asia was also backed up by reserve manager selling of domestic currencies which helped boost the euro into the London open. They maintain that further gains can be made without too much further resistance, given the current stacking on order books.

Conversely, technical indicators this morning say upside momentum isn’t as strong as today’s rally suggests. PIA First, a technical trading advisory and investment firm, argued that momentum was not strong despite the euro’s small bounce. The firm recommends reducing exposure at present levels for small gains and raising stops on longs to 1.4448.

It remains fundamentally cautious into next week however, recommending a cautious buy with a stop at 1.4139. Its three month trading signals are at 1.3969 and 1.4944.

Citigroup analysts say there is room for further downside against the EUR, and against other liquid alternatives such as the Australian dollar. The bank says it remains cautious, however, about the prospects for a sustained rally in EURUSD in particular given the lingering funding problems of some euro zone sovereigns.