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By XE Market Analysis December 17, 2019 3:36 am
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    XE Market Analysis: Europe - Dec 17, 2019

    The pound is down 0.5% on the day against both the dollar and euro, and is off by 0.4% versus the yen. The catalyst was news that UK prime minister Johnson will amend the withdrawal agreement bill to outlaw an extension in the transition period beyond the end of 2020. This is something of a surprise, though clearly this is a good negotiating tactic. To be sure, trade negotiations between the UK and EU should go much quicker than any of the EU's other trade negotiations with third countries, though many trade experts have said that one-year for even a bare-bones trade agreement would be a tall order. Malcolm Rifkind, a Conservative Party grandee who held cabinet posts under Margaret Thatcher and John Major, said during an LBC radio interview earlier, that Johnson, with a strong majority and with five years to play with before the next election, would still be apt to allow for a delay in the exit from the EU beyond 2020. Cable extended to correction from last-week's post election peak at 1.3515 to just over 2% in making a low at 1.3236 earlier. The UK currency remains above the pre-elections levels of 1.3176-68. Elsewhere, EUR-USD and USD-JPY have seen sub-20 pip ranges so far. The Australian dollar came under pressure after the release of the RBA's minutes from the early-December policy meeting, which mentioned that wage growth was no consistent with achieving the inflation target. Markets have taken this to mean that the February meeting is live, with a possibility for another 25 bps cut in the cash rate. AUD-USD posted a six-day low at 0.6857.

    [EUR, USD]
    EUR-USD has continued to ply narrow ranges in the mid 1.1100s, down from the eight-month high seen in the immediate wake of the UK election last week, at 1.1199. EUR-JPY and EUR-CHF have also settled lower after seeing respective a six-month and six-week highs. 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, 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, while the Eurozone economy has stabilized following a soft patch.

    [USD, JPY]
    USD-JPY has remained buoyant after posting a two-week high at 109.70 on Friday. The yen has been trading softer over the last week as global stocks rallied both into and after news that the U.S. and China have reached agreement on the "phase-1" trade deal. We are bullish of USD-JPY. The U.S. is enjoying what looks like a goldilocks economy -- growth slower, but still holding comfortably in positive expansion with inflation remaining benign, while the risk-on vibe in global markets should maintain Japan's yield-hungry investors' confidence in foreign investments.

    [GBP, USD]
    The pound is down 0.5% on the day against both the dollar and euro, and is off by 0.4% versus the yen. The catalyst was news that UK prime minister Johnson will amend the withdrawal agreement bill to outlaw an extension in the transition period beyond the end of 2020. This is something of a surprise, though clearly this is a good negotiating tactic. To be sure, trade negotiations between the UK and EU should go much quicker than any of the EU's other trade negotiations with third countries, though many trade experts have said that one-year for even a bare-bones trade agreement would be a tall order. Malcolm Rifkind, a Conservative Party grandee who held cabinet posts under Margaret Thatcher and John Major, said during an LBC radio interview earlier, that Johnson, with a strong majority and with five years to play with before the next election, would still be apt to allow for a delay in the exit from the EU beyond 2020. Cable extended to correction from last-week's post election peak at 1.3515 to just over 2% in making a low at 1.3236 earlier. The UK currency remains above the pre-elections levels of 1.3176-68.

    [USD, CHF]
    EUR-CHF has settled lower after spiking on Friday to a six-week peak of 1.1033 on news of the strong election victory of the Conservative Party at the UK's election. This heralds the end of a protracted period of Brexit related uncertainty, which had been casting a pall over both the UK and European economies. The euro also posted gains against the dollar and yen, and most other currencies, with the main exception being the case against the pound.

    [USD, CAD]
    USD-CAD has settled at firmer levels after yesterday printing a six-week low at 1.3115, making this the fourth consecutive week of declines. The Canadian dollar has been benefiting from positive developments on both the USMCA and U.S.-China trade fronts. The Fed's removing a forecast for a 25 bps hike in 2020 at its FOMC policy meeting last week also weighed on USD-CAD. Another supportive factor for the Canadian currency is higher oil prices, which are showing a near 9% gain from the lows seen in late November. Assuming there are no upsets on the trade front, USD-CAD looks likely to continue to trade with a downside bias.

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