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By XE Market Analysis December 12, 2019 4:28 am
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    XE Market Analysis: Europe - Dec 12, 2019

    The yen has printed fresh lows against the euro, Australian dollar and a number of other currencies, though USD-JPY edged out a two-day low in context of a less than 20-pip range. The declines in the Japanese currency come against the backdrop of global equity markets holding buoyant, although market optimism is guarded about the U.S. and China coming to an agreement on the partial phase-1 trade deal ahead of the U.S. scheduled tariff hike. The dollar, meanwhile, which came under across-the-board pressure yesterday after the Fed removed a forecast for a 25 bps hike in 2020, has remained heavy, posting fresh lows in the case against the pound and yen while holding near the lows versus other currencies. Cable printed an eight-and-a-half high at 1.3229. EUR-GBP, meanwhile, remained comfortably above recent 31-month lows, while GBP-JPY edged out a two-day high, coming within a few pips of the seven-month high the cross saw on Tuesday. Pound gains have come with the Conservative Party being odds-on favourite to win today's election, though a much-vaunted poll from YouGov, using the same methodology as a poll that accurately predicted the 2017 election result, has suggested the party's lead has slipped. The poll also showed the Brexit Party failing to win a single seat, and the no-deal Brexit possibility is now much diminished. Out of the five possible post-election scenarios, the worst for markets would be the Conservative Party winning no more than three seats and losing no more than six seats, which would mean the party would be dependent on Northern Ireland's DUP to form a minority government. The DUP would condition its support on a re-worked Brexit plan. Any other outcome would lead to either the current Brexit plan being implemented, or being subject to a second-referendum (if the Tories joined forces with the Liberal Democrats), or a softer Brexit plan being formulated by a Labour government, or Labour-led government, which would then be subject to a confirmatory referendum.

    [EUR, USD]
    EUR-USD has remained buoyant after posting a one-month high at 1.1144 yesterday. The high was a reflection of dollar weakness after the Fed removed a forecast for a 25 bps hike in 2020 at its FOMC policy meeting, while signalling an on-hold posture. The UK election today will have some bearing on the euro, given the implications for Brexit. Markets have been pricing in a Conservative Party victory, and a pricing out of no-deal Brexit risks, which has been an indirect support for the common currency (outside the case of EUR-GBP, which posted a 31-month low earlier in the week). EUR-USD has been trending lower since early 2018, dropping from levels near 1.2500 and posting a 32-month low at 1.0879 in earlier October, which is the current nadir of the trend. The pair has since settled in a range marked by 1.0981 and 1.1179. The pricing out of further Fed tightening, after the central bank hiked rates three times, has taken the wind out of the sails of the dollar. The pair will enter 2020 without strong directional impulse. The U.S. economy has been holding up, overall, though the avoidance of deeper trade protectionism will become more important for the economic outlook.

    [USD, JPY]
    The yen has printed fresh lows against the euro, Australian dollar and a number of other currencies, though USD-JPY edged out a two-day low in context of a less than 20-pip range. The declines in the Japanese currency come against the backdrop of global equity markets holding buoyant, although market optimism is guarded about the U.S. and China coming to an agreement on the partial phase-1 trade deal ahead of the U.S. scheduled tariff hike. The principal directional driver of the yen will likely to remain the ebb and flow of risk appetite in global markets. This will keep developments on the U.S.-Chine trade front will be front and centre. Assuming the phase-1 deal comes (eventually) to fruition, and with the U.S. economy enjoying what looks like a goldilocks economy -- growth slower, but still holding comfortably in positive expansion with inflation remaining benign -- then more upside would likely be seen in USD-JPY, as this would be a backdrop that would maintain Japan's yield-hungry investors confidence in foreign investments.

    [GBP, USD]
    Cable printed an eight-and-a-half high at 1.3229. EUR-GBP, meanwhile, remained comfortably above recent 31-month lows, while GBP-JPY edged out a two-day high, coming within a few pips of the seven-month high the cross saw on Tuesday. The pound's gains have come with the Conservative Party being odds-on favourite to win today's election, though a much-vaunted poll from YouGov, using the same methodology as a poll that accurately predicted the 2017 election result, has suggested the party's lead has slipped. The poll also showed the Brexit Party failing to win a single seat, and the no-deal Brexit possibility is now much diminished. Out of the five possible post-election scenarios, the worst for markets would be the Conservative Party winning no more than three seats and losing no more than six seats, which would mean the party would be dependent on Northern Ireland's DUP to form a minority government. The DUP would condition its support on a re-worked Brexit plan. Any other outcome would lead to either the current Brexit plan being implemented, or being subject to a second-referendum (if the Tories joined forces with the Liberal Democrats), or a softer Brexit plan being formulated by a Labour government, or Labour-led minority or coalition government, which would then be subject to a confirmatory referendum.

    [USD, CHF]
    EUR-CHF has steadied after printing a near-one-month low at 1.0910,. The cross to a degree been correlating with the ebb and flow of global stock markets, with the franc retaining a function as a safe haven currency despite the -0.75% deposit rate in Switzerland.

    [USD, CAD]
    USD-CAD dove yesterday amid a 2-3 bps narrowing in the 10-year U.S. versus 10-year Canada yield differential. This came after the Fed removed its forecast for a 25 bps hike in 2020 at its FOMC policy meeting. USD-CAD posted a one-week low at 1.3162, which is 4 pips shy of the five-week low seen last week. The pairing has scaled back about a big figure from the high seen after the stellar U.S. November jobs report last Friday.Taking a step back, the pairing is continuing to trade near the midway point of a broadly, at times choppy, sideways range that's been seen since July 2018. More of the same looks likely.

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