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By XE Market Analysis October 23, 2017 4:14 am
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    XE Market Analysis: Europe - Oct 23, 2017

    The dollar has traded mixed in early-week trading so far, gaining on the euro and yen, but losing ground to sterling, the Canadian dollar and other dollar bloc currencies. The yen weakened in the wake of Japan's election, which returned Abe as prime minister with a resounding mandate for a continuation of 'Abenomic' policies, which favour ultra-accommodative monetary policy. USD-JPY rallied to a fresh three-month high of 114.10 in early Asia-Pacific dealing before settling in the upper 113.0s. EUR-JPY logged a one-month peak at 134.12, and AUD-JPY also scaled to one-month highs. While the euro saw gains versus the Japanese currency, it fared worse against other currencies. EUR-USD logged a three-session low at 1.1751, and the common currency also posted losses against sterling and Swiss franc, among others. The latest developments out of Europe have been euro bearish. Catalonia's Puigdemont refused to accept Madrid's imposition of direct rule, while the Czech Repbulic's version of Trump, the anti-EU and anti-establishment billionaire Andrej Babis, stormed to the prime ministership following elections on Friday and Saturday.

    [EUR, USD]
    EUR-USD logged a three-session low at 1.1751, and the common currency also paosted losses against sterling and Swiss franc, among others. The latest developments out of Europe have been on the bearish end of the scale for the euro. Catalonia's Puigdemont refused to accept Madrid's imposition of direct rule, while the Czech Repbulic's version of Trump, the anti-EU and anti-establishment billionaire Andrej Babis, stormed to the prime ministership following elections on Friday and Saturday. With regard to EUR-USD, markets will also be focusing on the passage of the budget in the House, along with Trump's pending choice of who will take the helm of the Fed for the next term. The five candidates under consideration for the Fed job range from the dovish Yellen, the present chair of the central bank, to the decidedly hawkish Taylor. Trump is expected to announce his choice by November 3. With the Republican tax reform having made progress, we continue to anticipate further EUR-USD declines. Former support at 1.1785-87 has now reverted to resistance, while last week's low at 1.1730 marks initial support, ahead of 1.1700.

    [USD, JPY]
    The yen weakened in the wake of Japan's election, which returned Abe as prime minister with a resounding mandate for a continuation of 'Abenomic' policies, which favour ultra-accommodative monetary policy. USD-JPY rallied to a fresh three-month high of 114.10 in early Asia-Pacific dealing before settling in the upper 113.0s. EUR-JPY logged a one-month peak at 134.12, and AUD-JPY also scaled to one-month highs. With the Fed remaining on track to hike rates in December, and even though expectations for further hikes in 2018 have weakened, we retain a bullish view of USD-JPY. Support is at 113.38-40, and resistance is at 114.30.

    [GBP, USD]
    Sterling has managed to hold up well in the face of Brexit uncertainties. There were reports from the EU summit on Friday that PM May privately told EU diplomats that she is prepared to substantially up the current implied offer of 20 bln euros for the divorce settlement, which gave the pound a lift, though detail and confirmation have been lacking. France's Macron said that the Britain was not even "half way there," which implies that May will have to come back to the table with an offer of at least 40 bln euros. However, such an offer may not be politically viable for May given the presence of a powerful group of Brexiteers in her party, who have increasingly gone on the record to call for the UK to leave, or at least threaten to leave (and mean it), negotiations without a deal. This backdrop of uncertainty will continue to crimp the business investment decision making process. Indeed, five of the most prominent business lobby groups, including the Institute of Directors and the Confederation of British Industry, co-signed a letter to the government warning that time is running out while calling for an urgent Brexit transition deal or risk losing jobs and investment. This backdrop adds weight to dovish disputations at the BoE's Monetary Policy Committee, and should keep the pound's overall directional bias skewed to the downside.

    [USD, CHF]
    EUR-CHF has corrected back under 1.1600 after last week logging a 33-month high at 1.1629. Former EUR-CHF resistance at 1.1488-90 marks a key support. We have been anticipating an eventual return to 1.2000, which is the former trading floor of the SNB's, though this assumes that political tensions (Catalonia in particular) don't worsen, as the franc tends to find demand amid news developments that might be threating to the political integrity of the Eurozone.

    [USD, CAD]
    USD-CAD spiked on the Canadian data on Friday, with the pairing scaling to a seven-week high of 1.2624. The unexpected 0.3% m/m contraction in August retail sales sparked buying, while September CPI data came at expectations. We expect the bias will remain to the upside, with the Fed still seen on track to hike the Fed funds rate by 25 bp in December, and with BoC policymakers having actively dispelled any notion that it is on a committed tightening path. USD-CAD's October highs at 1.2591 and 1.2600, formerly resistance, now mark supports.

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