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By XE Market Analysis January 16, 2020 3:53 am
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    XE Market Analysis: Europe - Jan 16, 2020

    Narrow ranges have prevailed so far today, with the dollar consolidating after edging lower in recent sessions following the misses in December jobs and CPI data out of the U.S. EUR-USD plied a narrow range under the eight-day high seen yesterday at 1.1163. USD-JPY posted less than a 15-pip range so far today, capped on the upside by 109.99. The pair is consolidating strong gains from last week's low at 107.65, which was seen in the initial wake of the Iranian missile strike on U.S. military bases in Iraq, which capped out at the eight-month seen on Tuesday, at 110.21. Yen crosses have followed suit. Cabled edged out a three-day high at 1.3058, and GBP-JPY a six-day high, while EUR-GBP held above yesterday's low. AUD-USD clawed out a three-day peak at 0.6919 before settling back at near net unchanged levels near 0.6900. USD-CAD remained in a narrow range just above three-day low seen yesterday, at 1.3035. Equity markets have turned flat after the MSCI all-country world index edged out a fresh record following the signing of the phase-1 trade deal between the U.S. and China. It took nearly 20 months to arrive at this point, though the deal doesn't fully eliminate tariffs, while the $200 bln worth of U.S. products for China to buy is a target, and not set in stone. The enforcement mechanism worked into the deal also implies that there will be a risk snapback of U.S. tariffs or China's commitment. The two sides will also be working on a phase-2 deal, which deals with the thorny issues of security and technology transfers. Despite these reasons to be wary, there is conjecture that President Trump will for now go easy on China while he focuses on the November presidential election.

    [EUR, USD]
    EUR-USD plied a narrow range under the eight-day high seen yesterday at 1.1163. The dollar is consolidating after edging lower in recent sessions following the misses in December jobs and CPI data out of the U.S. 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. Momentum has faded with the Fed having back out of its tightening cycle after hiking rates three times last year. The ECB, meanwhile, remains entrench in a policy wait-and-see mode.

    [USD, JPY]
    USD-JPY posted less than a 15-pip range so far today, capped on the upside by 109.99. The pair is consolidating strong gains from last week's low at 107.65, which was seen in the initial wake of the Iranian missile strike on U.S. military bases in Iraq, which capped out at the eight-month seen on Tuesday, at 110.21. Yen crosses have followed suit. The BoJ's next policy meeting is up next week, where a no-change decision is widely anticipated, though the central bank is also expected to lift growth estimates as a consequence of the U.S.-China trade deal and de-escalation in Mideast tensions. Equity markets have turned flat after the MSCI all-country world index edged out a fresh record following the signing of the phase-1 trade deal between the U.S. and China. It took nearly 20 months to arrive at this point, though the deal doesn't fully eliminate tariffs, while the $200 bln worth of U.S. products for China to buy is a target, and not set in stone. The enforcement mechanism worked into the deal also implies that there will be a risk snapback of U.S. tariffs or China's commitment. The two sides will also be working on a phase-2 deal, which deals with the thorny issues of security and technology transfers. There is, however, conjecture that President Trump will for now go easy on China while he focuses on the November presidential election.

    [GBP, USD]
    The pound has found a better footing, recouping losses seen in the wake of sub-forecast CPI data out of the UK earlier in the week. Cable today edged out a three-day peak, at 1.3058. UK CPI fell to a rate of 1.3% y/y in December, contrary to the median forecast for an unchanged 1.5% y/y outcome, though the outcome is broadly in line with BoE projections. We retain an overall bearish view of the UK currency amid concerns about the durability of any post-election economic bounce, with Brexit issues likely to remain a concern. There is the risk of no-deal Brexit at the end of 2020, there is a real possibility of a deterioration in the UK's terms of trade for some years once the country leaves the transition period, and there are implementation issues with regard to new post-Brexit systems at the Northern Irish border. The upcoming BoE Monetary Policy Meeting, on January 30, is now a live meeting. The OIS market is discounting nearly an 60% chance for a 25 bp rate cut at the end of the month, up from about 50-50 odds before the inflation data. A rate cut is now fully factored-in by the end of May. The BoE-sensitive 2-year Gilt yield had dropped by nearly 20 bp over the last week. The next data of note out of the UK will be December retail sales, out on Friday. We expect sales to rebound 0.5% (median 07%) in following the 0.6% contraction in November.

    [USD, CHF]
    EUR-CHF extended recent losses to a fresh 33-month low at 1.0740. This is the sixth week out of the last seven that the cross has declined, with losses accelerating this week. News that the U.S. will retain some tariffs on Chinese goods imports until a second phase of a trade deal with China has been completed have seen momentum tail off in global stock markets, although the MSCI's global index still managed to edge out a new record high. The new low in the EUR-CHF cross is the culmination of quite a sharp drop from the seven-week peak of December 13, at 1.1033.

    [USD, CAD]
    USD-CAD ebbed back over the last day, printing a three-day low yesterday at 1.3035. The low reflected broader dollar softness, with the U.S. currency having lost some buoyancy following misses in U.S. jobs and CPI data over the last week. We anticipate the pairing to retain an upward bias for now, with risk appetite having abated in global markets following news that the U.S. will some retain tariffs on Chinese goods imports until a second phase of a trade deal with China is completed. This will likely continue to weigh on oil prices. Front-month WTI futures yesterday hit a six-week low at $57.38.

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