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By XE Market Analysis December 21, 2018 3:39 am
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    XE Market Analysis: Europe - Dec 21, 2018

    The Dollar majors have posted narrow ranges so far today, amid thin year-end volumes. Risk aversion has remained the dominant theme in equity markets in Asia following another negative closing on Wall Street on the familiar mix of the U.S. v China standoff and concerns about slowing global growth, although some Asian bourses, including Hong Kong and South Korea, have managed to stabilise, as have S&P 500 futures. USD-JPY and Yen crosses have steadied above the trend lows that were seen yesterday. USD-JPY has lifted to the 111.30-50 area, up from the three-month low printed yesterday at 110.81. EUR-JPY and AUD-JPY are also up from seven-week lows. EUR-USD has settled in the mid 1.1400s, consolidating after rallying every day this week, the biggest advance of which was seen yesterday on reaching a six-week high was at 1.1485. USD-CAD has drifted to a narrow range just under 1.3500 after logging an 18-month high at 1.3530 yesterday, while AUD-USD has settled above the seven-week lows that the pair saw yesterday. Sterling has become directionally dormant following recent Brexit-related volatility, with the UK Parliament now in recess until the new year and London interbank markets thinning out into the Christmas break.

    [EUR, USD]
    EUR-USD has settled in the mid 1.1400s, consolidating after rallying every day this week, the biggest advance of which was seen yesterday on reaching a six-week high was at 1.1485. The Dollar traded to lower ranges against most currencies this week as markets adjusted to a lower Fed tightening trajectory, as signalled at the conclusion of the FOMC meeting yesterday (even though the central bank's refrain from indicating a pause in the rate hike cycle sparked equity market losses). There has also been a degree of Euro outperformance, concomitantly with a rally in Italian assets on the back of a credible, EU-appeasing budget proposal has been tonic. EUR-USD's November-7 peak at 1.1500 provides a near-to target. In the bigger view, we see EUR-USD as having entered a broadly sideways range phase as markets continue to fathom the push of the populist political movement in Europe and the pull of a lower Fed tightening trajectory. Support comes in at 1.1439-40 and resistance at 1.1500.

    [USD, JPY]
    USD-JPY and Yen crosses have steadied above the trend lows that were seen yesterday. USD-JPY has lifted to the 111.30-50 area, up from the three-month low printed yesterday at 110.81. EUR-JPY and AUD-JPY are also up from seven-week lows. Risk aversion remained the dominant theme in equity markets in Asia following another negative closing on Wall Street on the familiar mix of the U.S. v China standoff and concerns about slowing global growth, although some Asian bourses, including Hong Kong and South Korea, have managed to stabilise, as have S&P 500 futures. Bigger picture, USD-JPY breached two-month range lows yesterday, at 111.37-40. We take a bearish view of USD-JPY on the view that global stock markets will entered a bear phase, correcting after a near decade winning streak as the era of ultra-accommodative monetary policy unravels.

    [GBP, USD]
    Sterling has become directionally dormant following recent Brexit-related volatility, with the UK Parliament now in recess until the new year and London interbank markets thinning out into the Christmas break. Yesterday's much stronger than expected UK retail sales and the widely expected no-change policy decision by the BoE cast little net impact. The BoE left the repo rate at 0.75% and QE unchanged, as had been widely anticipated. The votes for both decisions were unanimous at the nine-member committee, which had also been expected. The statement and minutes don't convey much shift in guidance, being so soon after last month's quarterly Inflation Report, and especially with Brexit uncertainty having put monetary policy in limbo. As for Brexit, all bets are off until the new year, with the UK Parliament having shut shop for the Christmas recess and with the London interbank market having entered into the year-end doldrums. The parliamentary vote on the Brexit deal and outline for a future relationship will take place in the week of January 14, before the legislated deadline of January 21. Our best guess remains that Parliament will vote down the deal and, of all the possible scenarios at that point, that a new EU referendum will be the path of least resistance. We see potential for the pound to rally as we think a no-deal Brexit scenario will be avoided.

    [USD, CHF]
    EUR-CHF has settled in the lower 1.1300s. The cross remains comfortably above the two-and-a-half month low seen last Tuesday at 1.1225. The SNB remained firmly on hold at its quarterly policy meeting this month, continuing to rely on the combination of negative interest rates and the threat of intervention to limit appreciation in the currency in times of heightened uncertainty about the global outlook.

    [USD, CAD]
    USD-CAD has drifted to a narrow range just under 1.3500 after logging an 18-month high at 1.3530 yesterday. While the Fed has shifted to a lower tightening trajectory, oil prices and other industrial commodity prices have tumbled to fresh trend lows this week on global growth concerns. This backstop, which looks likely to sustain well into 2019, should keep USD-CAD bias towards the upside. Support comes in at 1.3420-13. The 2017 high at 1.3793 provides and upside waypoint.

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