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By XE Market Analysis December 20, 2019 4:11 am
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    XE Market Analysis: Europe - Dec 20, 2019

    Narrow ranges have continued to be the norm as markets wind down into the Christmas and new year holiday period. EUR-USD has mustered less than a 10-pip range so far today, holding in the lower 1.1100s in what is now the seventh consecutive trading day the pair has been trading on a 1.11 handle. USD-JPY has managed a 15-pip range, with the base marked at 109.25. The pair is consolidating below the seven-month high at 109.72, seen in early December, which is the culmination of a rally from the late-August low at 104.45, a three-year low. Rallying global equity markets and a pricing out of Fed easing expectations have been keeping USD-JPY buoyant. While equity markets have settled today, the S&P 500 yesterday hit a sixth-straight record high, which is the longest streak since January 2018. All three major U.S. indexes posted new record closing highs yesterday. The gains came after U.S. Treasury Secretary Mnuchin said the U.S. and China would sign their Phase-1 trade deal trade pact in early January, and with the U.S. House of Reps having approved the new North American trade deal. Elsewhere among currencies, the Australian dollar managed fresh highs, building on gains seen after yesterday's above-forecast Australian jobs report. AUD-USD printed a one-week high at 0.6900. The pound has found a footing after tumbling to fresh lows against the dollar just after the London book closing yesterday. Cable posted a 16-day low at 1.2989, since recouping back above 1.3000, though set to close out today with its biggest weekly loss in just over two years.

    [EUR, USD]
    EUR-USD has continued to ply narrow ranges in the mid 1.1100s, below 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 managed a 15-pip range, with the base marked at 109.25. The pair is consolidating below the seven-month high at 109.72, seen in early December, which is the culmination of a rally from the late-August low at 104.45, a three-year low. Rallying global equity markets and a pricing out of Fed easing expectations have been keeping USD-JPY buoyant. While equity markets have settled today, the S&P 500 yesterday hit a sixth-straight record high, which is the longest streak since January 2018. All three major U.S. indexes posted new record closing highs yesterday. The gains came after U.S. Treasury Secretary Mnuchin said the U.S. and China would sign their Phase-1 trade deal trade pact in early January, and with the U.S. House of Reps having approved the new North American trade deal. We retain a bullish view 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 U-turned lower yesterday, more than giving up post-BoE announcement gains. Cable posted a 16-day low at 1.2989, since recouping back above 1.3000, though set to close out today with its biggest weekly loss in just over two years, having lost nearly 4% since last week's high. While the BoE said yesterday at the conclusion of its final policy meeting of the year, that gradual and modest tightening in monetary policy may be needed over the forecast horizon, the policymakers still highlighted that both global and Brexit risks remain on their radar screens. With regard to Brexit, prime minister Johnson's implied revival of the threat to leave the the EU without a deal (which we reckon is a bluff), has obliged markets to factor back in a discount to the UK currency. The UK election has also elevated the issue of UK devolution, with Scottish nationalists having won 81% of the parliamentary seats in Scotland and Northern Ireland seeing nationalist members of parliament outnumber unionist for the first time in history. We are of the view that Johnson isn't serious about a no-deal Brexit, which, to recap, would take the economy out of world's biggest free trade area, and out of the 40 trade agreements with 70 other countries that membership of the EU provides, and switch overnight to much less favourable WTO trade terms while simultaneously endeavouring to renegotiate over 750 treaties with over 160 non-EU countries. Ultimately we think the government will opt for a close relationship and close regulatory alignment with the EU for the reason that size and proximity matter when it comes to trade, especially as this would best preserve London as a the world's biggest financial centre.

    [USD, CHF]
    EUR-CHF has settled in the upper 1.08s after yesterday posting a new one-month low at 1.0867, which is the culmination of quite a sharp drop from the seven-week peak of last Friday, at 1.1033. The high was seen on news of the strong election victory of the Conservative Party at the UK's election, though the euro, tracking sterling, came back under pressure after UK PM Johnson this week implied that the no-deal threat was still an option.

    [USD, CAD]
    USD-CAD has been in rebound mode following a near three-week phase of decline from levels above 1.3000. The pair has printed a two-day high at 1.3124 in what is the first back-to-back daily gain since late November. USD-CAD needs to close out today below 1.3166 to wrack this week up as the fourth consecutive down week. 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 this month also weighed on USD-CAD. Another supportive factor for the Canadian currency is higher oil prices, which up be over 10% from the lows seen in late November. USD-CAD looks likely to continue to trade with a downside bias.

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