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By XE Market Analysis December 24, 2019 3:47 am
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    XE Market Analysis: Europe - Dec 24, 2019

    The main currencies are in a holiday-mode stasis now, which will likely remain the case through to January 2. Tokyo is the only main forex centre that will be open tomorrow. The Fed calculated broad inflation-adjusted trade-weighted measure of the dollar shows the currency to have put in a relatively narrow range this year. This dollar index (a much broader measure than the narrow DXY USD index) shows the dollar to be heading into 2020 just 0.4% up from the levels seen at the close of 2018. The dollar came under pressure during the Q1 before recouping after the hiked hiked interest rates three times. A subsequent pricing-out of further Fed tightening returned the dollar back to a steady directional footing. The U.S. economy has been holding up, while the Eurozone economy, and more broadly the global economy, looks to have stabilized following a soft patch. EUR-USD, after trending lower from levels above 1.2500 in early 2018 has steadied since making a 32-month low at 1.0879 in early October. After rebounding a little, the pair has since been trading narrowly, roughly within 1.1000 and 1.1200, with implied vols among major currencies hitting record lows during this time. We expect the dollar to hold firm in 2020, with the U.S. economy expect to hold up and with the Trump administration having incentive to be cooperative on the trade front into the November presidential election. Elsewhere, we expect the yen to remain under pressure, assuming global stock markets continue higher. The pound in trade-weighted terms remains down by about 8.5% from levels prevailing ahead of the vote to leave the EU in 2016. Brexit will now happen at the end of January, and the UK will enter a 11-month transition period before leaving the EU outright at the end of 2020. Most trade experts think this is too sort a time frame for a new trading deal between the UK and EU to be achieved, let alone establish global trade deals. We anticipate that the Breixt rubber hitting the road will curtail the pound's upside potential in 2020.

    [EUR, USD]
    EUR-USD has continued to ply narrow ranges 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 traded 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 early 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 in a directionally constrained stasis in the lower 109.0s. 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. The main U.S. equity indices last week hit fresh record highs. European and Asian markets, along with other global markets, have also remained buoyant, near trend highs. Anticipation of the U.S.-China trade deal and recent data showing a steadying in global growth following a recent soft patch have been maintaining a risk-on sentiment in global markets. 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 in trade-weighted terms remains down by about 8.5% from levels prevailing ahead of the vote to leave the EU in 2016. Brexit will now happen at the end of January, and the UK will enter a 11-month transition period before leaving the EU outright at the end of 2020. Most trade experts think this is too sort a time frame for a new trading deal between the UK and EU to be achieved, let alone establish global trade deals. We anticipate that the Breixt rubber hitting the road will curtail the pound's upside potential in 2020.

    [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 December 13, 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 last week implied that the no-deal threat was still an option.

    [USD, CAD]
    USD-CAD has found a footing after a near three-week phase of decline from levels above 1.3300. The pair on Friday printed a rebound-high at 1.3181, though this wasn't enough to prevent a fourth consecutive down week being logged. The Canadian dollar has over the last month 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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