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By XE Market Analysis November 7, 2018 11:07 am
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    XE Market Analysis: Europe - Nov 07, 2018

    The Dollar has traded moderately lower as early U.S. midterm elections results confirmed the Democrats to be wresting control of the House while the GOP retained control of the Senate, an outcome that was largely predicted by polls. The USD index (DXY) is showing a modest 0.2% decline, continuing losses seen over the prior two days, and earlier printing two-week low at 95.90. EUR-USD has concurrently lifted, posting a two-week high of 1.1473. S&P futures are off highs but are still showing a fractional 0.2% gain. USD-JPY settled fractionally lower, to the lower 113.0s, after seeing some intraday chop into and after the Tokyo fixing. The election outcome heralds political deadlock and uncertainty for investors. The Trumpian agenda for lower regulation, lower taxes will come to a halt, while there is also the view that Trump, being a dealmaker and not ideologically restricted (having been a registered Democrat most of his life), will work with the Democrats, suggesting that he may not prove to be lame duck during the second half of his presidential term.

    [EUR, USD]
    EUR-USD posted a two-week high of 1.1473, reflecting a broader ebb in the Dollar has incoming results from the U.S. midterm elections affirmed pre-election polls as the Democrats seized control of the House. While the Republicans retained control of the Senate, also as largely anticipated, the election outcome heralds political deadlock and uncertainty for investors. The Trumpian agenda for lower regulation, lower taxes will come to a halt, while there is also the view that Trump, being a dealmaker and not ideologically restricted (having been a registered Democrat most of his life), will work with the Democrats, suggesting that he may not prove to be lame duck during the second half of his presidential term. We still retain a bearish view of EUR-USD with signs of flagging economic growth momentum in the Eurozone, along with concerns about the Eurosceptic political movement, juxtaposing a U.S. economy in relative health (as evidenced by Friday's October employment report).

    [USD, JPY]
    USD-JPY has remained buoyant, edging out a 113.36 high, which is within 2 pips of the four-week high that was printed last week. EUR-JPY, meanwhile, is with a hair's breath of two-week highs, and AUD-JPY is within a few pips of the one-high posted yesterday. The Nikkei 225 closed with a 1.14% gain in what has been a mixed session across Asian bourses, with Chinese markets lower, once again, despite a positive close on Wall Street and modest advance in S&P 500 futures. Directional ambition looks to be curtailed into today's midterm elections in the U.S, which carries potential implications for Trumpian economic policy should the Democrats wrest control of the House. USD-JPY's fundamentals (yield differentials and the associated contrast between Fed and BoJ policy paths) remain supportive, although periodic episodes of risk aversion has been an intermittent offsetting bearish force. USD-JPY has support at 112.35-37.

    [GBP, USD]
    Cable posted a three-week high at 1.3149, partly on broader Dollar weakness but also in part on continued Sterling firmness with the UK's currency concurrently posting five-month highs against the Euro and four-week highs versus the Yen. The pound is up by an average of nearly 3% versus the G3 currencies since levels this time last week, but remains down by an average of over 0.5% against these currencies on the month-on-month comparison and is over 2.5% for the worse on the year-to-date. The pound also remains about 11% down in trade-weighted terms from the levels prevailing just ahead of the Brexit referendum in June 2016. Recent gains have reflected a lessening in sterling's Brexit premium, though there is a risk that hopes of the EU and UK are near to (finally) making an agreement on divorcing terms are being overegged as the seemingly intractable Irish border backstop issue still remains unresolved. We continue to advise caution, seeing limited scope for sustained gains in the pound unless there is concrete breakthrough. Even if a deal is reached, there would remain significant uncertainty about whether it would be pass at parliamentary vote. Cable has support at 1.3041-43.

    [USD, CHF]
    EUR-CHF has recouped back above 1.1400, recovering rom the five-week printed at 1.1355 in late October, which extended a descent from levels above 1.1500. The cross has support at 1.1405-10.

    [USD, CAD]
    USD-CAD has settled around 1.3100, above the 12-day low seen on Friday at 1.3049 and below the two-month high see last Wednesday at 1.3170. Fresh seven-month lows in oil prices, coupled with Friday's miss in Canada's October jobs report, which contrasted with the strong U.S. jobs report for the same month, should keep USD-CAD underpinned. USD-CAD has support at 1.3049-50, and resistance at 1.3137-40.

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