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By XE Market Analysis December 14, 2017 2:56 am
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    XE Market Analysis: Europe - Dec 14, 2017

    The USD index (DXY) fell 0.8% over the last day in logging a eight-day low of 93.34 during Asian trading today. The index has since settled around 92.45. The losses follow yesterday's cooler than expected CPI data out of the U.S. ,which was followed by an as-expected 25 bp rate hike from the Fed, while retaining the outlook for three tightenings in 2018 in its dot-plot, rather than four, which had been speculated on by markets. The Fed's statement also noted that headline and core inflation had declined this year. The dollar will likely remain on a softer footing over the coming days as a lower range establishes on the softer-than-hitherto-thought trajectory of Fed tightening. Focus now turns to the SNB, ECB and BoE announcements.

    [EUR, USD]
    EUR-USD clocked a six-session high of 1.1844 amid the generally softer dollar environment, which was generated by cooler than expected November CPI data out of the U.S. and the Fed's less hawkish than had been generally envisaged guidance after delivering what was a fully discounted quarter point rate hike yesterday. Focus now squares on the ECB's policy announcement today, which will be accompanied by updated economic projections. The big question is whether the central bank's president, Draghi, will commit to an end date for the QE program, an event that would likely spark strong euro buying. Even if he refrains from this, we still anticipate that the ECB will revise growth and inflation projections, and note a tightening output gap. We therefore take a bullish view of EUR-USD. Support is at 1.1791-92, and we look for a return to November highs in the mid 1.19s.

    [USD, JPY]
    USD-JPY logged a five-session low of 112.46, extending a decline from the four-week high seen on Tuesday at 113.75. Yield differentials have driven the move following the sub-forecast CPI readings out of the U.S. yesterday, and with the Fed, after delivering the fully discounted 25 bp rate hike, refraining from shifting up guidance to four rates hikes in 2018, instead sticking with three. Technically, a broadly sideways chop centred, roughly, between 108.0 to 115.00, has been persisting for eight months now. More of the same looks likely, though near-term bias is downward. Resistance comes in at 113.10, which was a former support.

    [GBP, USD]
    Cable rallied to a four-session peak of 1.3448 on the back of the dollar's underperformance over the last day, though the pound has trade more indifferently versus other currencies, such as in the cases against the yen and euro. Brexit-related uncertainty also still prevails, despite last week's breakthrough on divorce terms, as we're still non-the-wiser as to what Brexit will look like -- whether a hard exit or a soft exit, which comes amid the backdrop of a higher convoluted political picture in the UK. Cable has support is at 1.3410, and resistance at 1.3469-70.

    [USD, CHF]
    EUR-CHF has seen choppy 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 today), we anticipate EUR-CHF will make an eventual return to 1.2000. Support is at 1.1620.

    [USD, CAD]
    USD-CAD ebbed to a six-day low of 1.2791 before settling around 1.2830. Yield differentials drove the dip following benign inflation data out of the U.S. yesterday, which was backed up by a less hawkish than had been expected guidance from the Fed after it delivered a fully discounted quarter point rate hike. On the other hand, softer oil prices have undermined the Canadian dollar somewhat, while today's speech by the BoC governor, Poloz, it likely to reaffirm a slow-go approach to further tightening, and can be expected to refrain from making any commitment to rate hikes. We also expect manufacturing and housing data out of Canada today and tomorrow, to come in on the softer side of expectations. USD-CAD looks set for a phase of limited directional bias. Support is at 1.2790-91.

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