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By XE Market Analysis December 19, 2013 3:13 am
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    XE Market Analysis: Europe - Dec 19, 2013

    The USD recovered from an initial dip and rallied pretty much across the board in the wake of the Fed's announcement of a $10 bln QE taper. The U.S. currency traded like an 'asset currency' as it rebounded from an initial dive in sympathy with Wall Street as the Fed signalled a slightly more dovish forward guidance to offset the taper, with the exceptionally low stance to remain in place until unemployment falls well below 6.5%. The most notable mover was USD-JPY, which surged through the recent peak of 103.92 to a new major-trend peak of 104.36, subsequently ebbing back to the 103.90 area during the Tokyo session. EUR-USD briefly tested 1.3800 in the immediate wake of the Fed but, failing at this level once again, turned lower and dove to a two-week low of 1.3649. Decent selling was seen in EUR-JPY in Tokyo, reportedly a mixture of Japanese exporter selling and speculative profit taking, and the cross pulled back nearly an entire big figure from the new major-trend peak of 142.90. News that EU finance ministers agreed on the bank failure plan had little impact. Cable held up well in the wake of the solid labour market report yesterday. Moody's said that the Fed's tapering will lead to higher rates globally.

    [EUR, USD]
    EUR-USD correlated inversely with stock markets, briefly testing 1.3800 in the immediate wake of the Fed tapering announcement but, failing at this level once again, turning lower and diving to a two-week low of 1.3649. The Fed signalled a slightly more dovish forward guidance to offset the $10 bln taper, with the exceptionally low rate stance to remain in place until unemployment falls well below 6.5%. This went down well on Wall Street, and the dollar followed stocks higher. Decent selling was seen in EUR-JPY in Tokyo, reportedly a mixture of Japanese exporter selling and speculative profit taking, and the cross pulled back nearly an entire big figure from the new major-trend peak of 142.90. News that EU finance ministers agreed on the bank failure plan had little impact. The euro's recent failures above 1.3800 had painted a technical picture of waning upside momentum, especially with levels having looked quite stretched above the 50- and 200-day moving averages relative to historical norms. Support now comes in at 1.3640 ahead of the Dec-6 low of 1.3618.

    [USD, JPY]
    USD-JPY surged and broke above the recent peak of 103.92 to a new major-trend peak of 104.36, subsequently ebbing back to the 103.90 area during the Tokyo session. EUR-USD briefly tested 1.3800 in the immediate wake of the Fed but, failing at this level once again, turned lower and dove to a two-week low of 1.3649. Decent selling was seen in EUR-JPY in Tokyo, reportedly a mixture of Japanese exporter selling and speculative profit taking, and the cross pulled back nearly an entire big figure from the new major-trend peak of 142.90. USD-JPY is likely to remain on an upward path, we are targeting 105.00, as the BoJ's stance, being set to do more QE, contrast that of the Fed.

    [GBP, USD]
    Sterling held its ground against the generally firm USD today after surging on Wednesday on news of the unexpected unemployment drop, which fell to 7.4% in October to complete a two-month 0.3 of a percentage point decline with the 99k dive in unemployment the biggest drop in over 13 years. The drop in the unemployment rate is much quicker than the BoE had projected under its forward guidance framework. The release of the BoE MPC minutes showed that members were concerned that any further "substantial" appreciation in sterling would slow the recovery, though this has largely been ignored by markets. Recent data, including the 18-year high in the CBI industrial trends figure, fits the prevailing status of the U.K. being one of the quickest expanding developed-nation economies. We have continued to target Cable to 1.6500.

    [USD, CHF]
    The safe haven Swiss currency corrected in the wake of the Fed's stock-market friendly announcement (offsetting the commencement tapering with an increase in dovish forward guidance). The rally in stock markets reflects a degree of relief for investors, enabling the CHF to trade lower. EUR-CHF is biased to 1.2280 resistance, which marks a series of former lows seen between October and November. Support is now at 1.2220 and 1.2200. USD-CHF faces some resistance at 0.8960-70 and again at 0.9000, but can be expected to breach these now that the period of uncertainty about the Fed policy has passed.

    [USD, CAD]
    USD-CAD surged in the wake of the Fed's decision to commence tapering, breaking above the recent trend high of 1.0707 and rallying to a new three-year peak of 1.0727. Although the Fed upgraded dovish forward guidance to offset its tapering announcement, the Fed's stance contrasts the move dovish BoC. Initial USD-CAD support comes in at 1.0700, ahead of 1.0650. The pair is looking stretched technically, which is to say by historical price deviations, so a bullish tactic would be to wait for near-support levels before entering a long position.

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