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By XE Market Analysis December 13, 2018 3:28 am
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    XE Market Analysis: Europe - Dec 13, 2018

    A risk-on theme has been coursing through forex markets, concomitantly with rallying global equity markets, which has seen the Dollar bloc currencies rise and the Yen decline. The biggest mover out of the main Dollar pairings and associated cross rates has been AUD-JPY, which is showing a 0.4% gain heading into the London interbank open. AUD-USD has printed a one-week high at 0.7242. USD-CAD has traded back under 1.3400, down from last week's 18-month high at 1.3445. USD-JPY has remained buoyant, lifting out of yesterday's lows at 113.14-15 but has so far remained shy of yesterday's 10-day high at 113.51. EUR-USD has continued to oscillate in the 1.1300s, near the midway point of the range that's been unfolding for about six weeks now. As for the Brexit-afflicted Sterling, the UK currency rallied before more than reversing gains seen in the immediate wake of the Conservative Party's vote of confidence in Prime Minister May. The problem is that she survived with almost a third of her party having voted against her, suggesting that the Withdrawal Agreement deal is nearly certain to be rejected by Parliament -- unless in the highly unlikely scenario that the EU gives a major concession by term-limiting the Irish border backstop clause (which would render the whole point of it as meaningless; something that Ireland, in the strong negotiating position that it is in, would not in all likelihood acquiesce to).

    [EUR, USD]
    EUR-USD has continued to oscillate in the 1.1300s, near the midway point of the range that's been unfolding for about six weeks now. We expect the Euro to remain heavy, weighed on by political uncertainty in Europe, with French President Macron facing a parliamentary debate today on a possible no confidence vote. Brexit concerns remain with UK PM May having survived a no confidence vote at the heft cost of nearly a third of her party voting against her, suggesting that the Brexit deal has little chance of being passed in Parliament (unless in the very unlikely scenario that the EU -- Ireland -- agrees to term-limited the Irish border backstop). This backdrop has served to make the Dollar a more attractive proposition, despite the ongoing recalibration in Fed policy expectations. The risk of a lose-lose no-deal Brexit scenario is also a negative for the Eurozone economy. EUR-USD has been in a bear trend since April, although downside momentum has abated in recent weeks. We still take an overall bearish view of the pairing. The U.S. economy remains strong, even if the Fed's tightening course is heading for a pause, while conviction for eventual ECB tightening has concurrently faded with the Eurozone economy losing momentum. The Eurosceptic populist movement gripping parts of the Eurozone, to which Italy's budget-planning woes, the riots in France and the Brexit mess are all symptoms, also remains a concern. EUR-USD has resistance at 1.1390-92, and support at 1.1300.

    [USD, JPY]
    USD-JPY and Yen crosses have remained buoyant amid a backdrop of rallying global equity markets. USD-JPY lifted out of yesterday's lows at 113.14-15 but has so far remained shy of yesterday's 10-day high at 113.51. USD-JPY has support at 113.31-33, and resistance at 113.65.

    [GBP, USD]
    Sterling rallied before more than reversing gains seen in the immediate wake of the Conservative Party's vote of confidence in Prime Minister May. She cannot now be challenged again for 12 months, but the problem is that she survived with almost a third of her party having voted against her, suggesting that the EU Withdrawal Agreement deal is nearly certain to be rejected by Parliament -- unless in the highly unlikely scenario that the EU gives a major concession by term-limiting the Irish border backstop clause, which would render the whole point of it as meaningless; something that Ireland, in the strong negotiating position that it is in, is not in all likelihood going to acquiesce to. Our best guess is that the deal is destined to fail in parliament, and at this point May will call another referendum, assuming her government survives a push by the Labour Party for an early general election. In the meanwhile, the Pound will remain heavy. We envisage Cable to already be in process forming a trading range in the mid 1.2000s. Cable has support at 1.2580, and resistance at 1.2675-78..

    [USD, CHF]
    EUR-CHF has recouped back toward 1.1300, up from the two-and-a-half month low seen on Tuesday at 1.1225. The losses reflected Brexit-related angst, which weighed on both the Pound and the Euro while reviving the Franc's historic role as a safe haven (despite the punishing -0.75% overnight deposit rate). The SNB conducts its next quarterly policy review today. The central bank has been continuing to tread carefully amid heightened uncertainty about the economic outlook, geopolitical risks and protectionist threats. Recent market volatility and Brexit risks will do little to change the SNB's stance, and we expect the central message to remain that the situation remains fragile and the currency "highly valued" while maintaining policy unchanged.

    [USD, CAD]
    USD-CAD has remained buoyant but below last week's 18-month high at 1.3445. A rebound, or at least steadying, in oil prices after OPEC agreed on a 1.2 mln barrel per day output cut, along with Friday's sub-forecast U.S. jobs report, have curtailed USD-CAD's upside momentum. Overall, we continue to take a bullish view. The pair has resistance at 1.3445-50, and support at 1.3320-21.

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