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By XE Market Analysis December 27, 2017 3:19 am
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    XE Market Analysis: Europe - Dec 27, 2017

    The dollar has been trading with a soft tilt, with USD-JPY edging out a four-session low at 113.12, EUR-USD a four-session high at 1.1884, and USD-CAD making three-week low and AUD-USD a two-month high, at 0.7750. This has come despite robust producer sentient data yesterday out of the U.S., along with the expected fiscal stimulus to come after the passing of the U.S. tax overhaul bill last week. London and other key interbank centres reopen today, though staffing levels and client activity will remain very low until next Tuesday. The calendar is very lightly in Europe and North America today, highlighted by UK mortgage data, an Italian bond sale, and U.S. consumer confidence data.

    [EUR, USD]
    The euro has been this year's star performer out of the main currencies, registering a near 13% year-to-date gain versus the dollar, which is the weakest. The abatement of existential political threats along with gathering economic growth momentum have underpinned the common currency. We anticipate overall directional bias to shift downwardly in early 2018, however. The passage of the $1.5 tln tax bill in the U.S., which will be largely deficit financed and will slash the corporate tax rate, among other things, is generally seen as a positive for the dollar, heralding a loosening in fiscal policy with the implication of monetary policy being tighter than would have otherwise have been the case. EUR-USD has support at 1.1809-10, and resistance at 1.1900-01.

    [USD, JPY]
    The yen is finishing the year on a consolidative tack after a weakening phase, which last week saw EUR-JPY and AUD-JPY, for instance, trading at respective 26-month and eight-week highs. USD-JPY traded at two-week highs before turning somewhat lower. The BoJ left monetary policy unchanged at its meeting last week, signalling that it is in no rush to exit from crisis-mode stimulus policies despite maintaining an upbeat view on the economy. Governor Kuroda emphasized that the central bank will remain committed to dovish policy settings even if the government declares that the threat of deflation has ended. Technically, USD-JPY is amid a broadly sideways chop, roughly centred between 108.0 to 115.00, which has been persisting for eight months now. We are anticipating the dollar to rally in early 2018 as markets digest looser fiscal policy in the U.S.

    [GBP, USD]
    Sterling has traded mixed this year, gaining on the dollar while losing ground to the euro. Into 2018, we expect the pound will maintain the 15% trade-weighted discount that's been roughly persisting since the Brexit vote in June 2016. The Brexit negotiation process will continue to dominate the UK's agenda, and the weak political position of the prime minister and her minority government will continue to be a font of uncertainty for investors and business leaders. Given our bullish dollar view, we see the risks for Cable are skewed to the downside. Resistance is at 1.3394-96, and support is at 1.3310.

    [USD, CHF]
    EUR-CHF rallied to levels last seen in January, 2015, when the SNB pulled its support from the pairing. We remain bullish over the medium term. Assuming the Eurozone has conquered existential political threats, and assuming the SNB remains anchored to ultra-accommodative monetary policy, which looks likely to be the case for the foreseeable future (the central bank reaffirmed this commitment at its quarterly policy review last week), we anticipate EUR-CHF will make a return to 1.2000.

    [USD, CAD]
    USD-CAD has failed to hold gains above 1.2900 on multiple occasions since early October, the latest episode of such having been seen last week. Over the holiday period we anticipate the pair to hold in a rough 1.2700 to 1.2900 consolidation range. Ahead into 2018, how the U.S. dollar benefits from the expected tax overhaul, how oil prices evolve, how NAFTA re-negotiations go, and how the BoC proceeds with its slow-go tightening cycle will be dominant themes for USD-CAD heading into 2018.

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