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By XE Market Analysis December 12, 2017 3:23 am
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    XE Market Analysis: Europe - Dec 12, 2017

    USD-JPY eked out a new four-week high of 113.69, and the New Zealand dollar rallied strongly following an announcement that a new RBNZ governor had been appointed, which was greeted as a something of a relief by Kiwi markets (the currency having been under pressure amid a cloud of policy uncertainty following elections in September). USD-JPY's high came amid a risk-on backdrop, with equity markets rallying across the Asia region today following Wall Street's lead after the S&P 500 notched up another closing record on Friday. The dollar has subsequently come under modest pressure versus the yen and other currencies. USD-JPY has ebbed back under 113.40, while EUR-USD has lifted above 1.1790, above 30 pips up on Friday's closing level. Sterling has been traded mixed, and in narrow ranges, with markets still digesting the deal on the Brexit divorcing terms, as it included quite a lot of concessions on the UK's part, while fathoming the challenges that lie ahead in negotiations for a post-Brexit trade deal.

    [EUR, USD]
    EUR-USD has settled near 1.1780, lacking direction after the rebound from Friday's 1.1730 low stalled at levels above 1.1800. Directional bias will be limited into of some key data and central bank policy decisions this week, which include the Fed, ECB, BoE and SNB. Friday's U.S. jobs report for November kept the Fed on course to hike this week, which is fully baked into market expectations. With Fed funds futures pricing in about 60% odds for a follow-up rate hike in March, markets will be sensitive to the Fed's forward guidance tomorrow. With the labour market tightening, we expect the Fed will affirm that another hike is in the works as soon as March, which in turn should given the dollar a fresh underpinning. The ECB's decision, on Thursday, may produce a commitment to ending QE, though we think the Fed's guidance will "out hawk" the ECB's, leaving EUR-USD vulnerable to the downside. EUR-USD has resistance at 1.1814-15 and again at a.1845-50. Support comes in at 1.1767-70.

    [USD, JPY]
    USD-JPY has plied a narrow 14 pip range so far today, between 113.43 and 113.57, settling toward the lower part of this range, which roughly marks the midway point of yesterday's range. EUR-USD and the other main dollar pairings have posted similar narrow ranges. The NZ dollar is an exception, with the currency having rallied for a second successive session as markets continue to react to yesterday's announced appointment of Adiran Orr as the new RBNZ governor. NZD-USD logged a two-week high at 0.6937. As for USD-JPY, the pairing remains is in an up phase within what has been a broadly sideways chop around, roughly, 108.0 to 115.00, for eight months now. More of the same looks likely. Resistance comes in at 113.73-75, and support comes in at 113.10 and 112.70.

    [GBP, USD]
    Sterling started the week on a soft footing, more than reversing the gains seen late last week versus the dollar and euro on news that the EU and UK had reached an agreement on Brexit divorce terms. Cable logged a three-session low at 1.3330, extending losses from Friday's peak at 1.3521. Last week's divorce agreement didn't actually resolve the Irish border issue in the scenario of a hard Brexit -- that the UK makes a clean break from the EU, and its single market and customs union -- as a customs-free border between Northern Ireland and the Republic would be surely unworkable in this context. The agreed "regularity alignment" was not so much a solution but a mutually convenient political device to move talks to the next phase, on trading terms. The British government, for its part, still hasn't committed to what Brexit should look like. Uncertainty prevails, despite last week's break through. This backdrop should help ensure that the BoE remains on the side lines at its meeting this Thursday, having hiked the repo rate by 25 bp at its meeting last month. We anticipate Cable's near-term bias will remain to the downside. Resistance is at 1.3409-10, support at 1.3320.

    [USD, CHF]
    EUR-CHF has seen volatile price action over the last couple of weeks, having turned lower after several attempts above 1.1700. There have been multiple failures to sustain gains above 1.1700 over the last month, and market participants will be wary of supply above this level. We still remain bullish over the medium term, however. Assuming the Eurozone has conquered existential political threats, and assuming the SNB remains anchored to ultra-accommodative monetary policy, which looks likely to be the case for the foreseeable (the central banks meets on policy this Thursday), we anticipate EUR-CHF will make an eventual return to 1.2000. Support is at 1.1650.

    [USD, CAD]
    USD-CAD has ebbed to the lower 1.128s after logging a five-session peak of 1.2880 on Friday. The gains reversed nearly all of the sharp losses that were seen on Dec-1 following above-forecast GDP and employment data out of Canada. The BoC's cautious guidance following its policy meeting last Wednesday, when it left its policy rate at 1.0%, as had been widely anticipated, has been weighing on the Canadian buck. In particular, the BoC noted that slack remains in the labour market, despite recent rises in overall employment. We advise following USD-CAD's nascent uptrend for now. Support is at 1.2785.

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