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By XE Market Analysis December 15, 2017 3:28 am
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    XE Market Analysis: Europe - Dec 15, 2017

    The dollar has been traded mixed, posting fresh losses versus the yen and the Australian, New Zealand and Canadian dollar, consolidating gains it saw yesterday versus the euro, in the wake of the ECB's announcement and guidance, and holding steady-to-firmer against a raft of emerging-world currencies. The pound, meanwhile, is trading versus the dollar near the levels prevailing ahead of the BoE announcement and statement yesterday, having managed to recoup losses. USD-JPY is down, having ebbed back below 112.20, though has so far remained above yesterday's nine-day low at 112.06. Mostly weaker stock markets in the Asia-Pacific region, along with a solid reading from the latest quarterly Tankan survey of business confidence in Japan, which showed the best quarter for Japanese manufacturers since 2006, were factors that have been conducive for yen strength. EUR-USD and euro crosses consolidated losses seen in the wake of the ECB's dovish guidance yesterday. EUR-USD made time in a narrow range in the upper 1.17s. More of the same seems likely today. Sterling markets will pay particular attention to Brexit talks at the EU's leaders' summit.

    [EUR, USD]
    EUR-USD and euro crosses consolidated losses seen in the wake of the ECB's dovish guidance yesterday. EUR-USD made time in a narrow range in the upper 1.17s. The pair still remains nearly a big figure up on the levels that were prevailing ahead of the U.S. CPI report on Wednesday, data which sparked a down phase in the dollar, a theme added to by the less hawkish than anticipated guidance from the Fed. The ECB left policy on hold, and while up-revising growth projections it emphasized a continued benign inflation outlook, noting that "an ample degree of stimulus is still needed." We see EUR-USD has remaining in a trading range roughly centred on 1.1700 and 1.1900.

    [USD, JPY]
    USD-JPY has declined today, ebbing back below 112.20, though has so far remained above yesterday's nine-day low at 112.06. Mostly weaker stock markets in the Asia-Pacific region, along with a solid reading from the latest quarterly Tankan survey of business confidence in Japan, which showed the best quarter for Japanese manufacturers since 2006, were factors that have been conducive for yen strength. Technically, a broadly sideways chop centred, roughly, between 108.0 to 115.00, has been persisting in USD-JPY 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 capped out in the wake of the BoE announcement and guidance following its December MPC policy meeting yesterday. That left a one-week high at 1.3470, with the pair having settled in the lower 1.34s. The BoE left the repo rate at 0.5% and QE totals unchanged, while its communication reaffirmed the "slow and gradual" approach to further tightening it specified in November, and there is nothing in the central bank's guidance today to chance the market consensus view that there will be two more 25 bp rate hikes by the end of 2020, with the central bank likely to remain in a dormant wait-and-see mode over the coming months. The BoE stated that "further modest" rate hikes would be warranted over "the next few years," but flagged that growth may be softer than expected in the current quarter, and that inflation "is likely to be close to its peak, and will decline towards the 2% target in the medium term." The BoE also repeated that the Brexit process is damping business investment and remains the most significant source of uncertainty on the economic outlook. On the flipside, the BoE also noted that slack the economy is diminishing, which policymakers are watching closely. 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 bank reaffirmed this commitment at its quarterly policy review yesterday), we anticipate EUR-CHF will make an eventual return to 1.2000. Support is at 1.1620.

    [USD, CAD]
    USD-CAD has remained heavy, sinking back to around 1.2750 after failing to sustain rebound gains above 1.2800 yesterday, though the pair has so far remained above yesterday's nine-day low at 1.2714. Yield differentials have been swinging this week in favour of the downside for USD-CAD. A speech by BoC governor Poloz yesterday inspire a spike in Canadian yields as he stressed that the word "caution" is note a code word for being on hold while saying that policymakers are increasingly confidence that less stimulus will be needed. The U.S. dollar dynamic has also shifted following benign CPI inflation data out of the U.S. on Wednesday, 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, though we take a bearish view of USD-JPY. Resistance is at 1.2790-91.

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