EUR/USD: Draghi’s Comments, Fiscal Cliff Hopes Support the Euro

The Euro is deemed to continue its strength opposite the US dollar today as European Central Bank President Mario Draghi foresees a gradual economic recovery for the Euro Zone in the next year. Meanwhile, the single currency is also seen to receive support from fresh optimism that the US fiscal cliff budget impasse could be settled before tax hikes and spending cuts begin to take effect early next year.

In a testimony to the European Parliament’s Economic and Monetary Affairs Committee in Brussels yesterday, ECB chief Mario Draghi expressed that the central bank’s policies and governance reforms in the region have revived confidence that will help foster a steady recuperation in the second half of 2013. According to Draghi, the ECB’s commitment back in July to preserve the Euro at any cost and the establishment of a single banking supervisor have improved financial-market sentiment, helping create a mood of optimism for 2013. A priority then for the next year is to create a single resolution mechanism to complete the banking union.

Draghi also hailed last week’s landmark deal to give the ECB powers to supervise the region’s banks from March 2014, essentially taking the first step in a new phase of integration to help buttress the bloc. New powers to oversee Euro area banks will help restore confidence in the financial sector, revive interbank lending and stimulate cross-border credit flows, he said. Combines with a possible direct recapitalization of banks by the European Stability Mechanism and an expected single resolution mechanism, the single supervisory mechanism help considerably in breaking the vicious feedback loops between sovereign governments and banks. With the Draghi adding to the voices of optimism over the Euro Zone’s prospects for recuperation next year, the single currency is deemed to incline.

Over to the US, risk-on trades are believed to heighten after US President Barack Obama made a counter-offer to Republicans that included a major change in his position on tax hikes for the wealthy. During a meeting with House Speaker John Boehner yesterday, Obama is said to have laid out an offer that reduces the amount new revenue he is seeking to $1.2 Trillion over the next decade and limiting the hike in tax rates to households earning more than $400,000 a year, almost double his previous threshold of $250,000. On hopes that both sides are inching closer to a deal, enhanced appetites for risk are presumed to strengthen the Euro further. As such, a long position is advised for the EUR/USD trades.

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