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By XE Market Analysis December 18, 2013 3:12 am
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    XE Market Analysis: Europe - Dec 18, 2013

    EUR-USD remains at familiar levels in the upper 1.37s after subdued pre-Europe, pre-FOMC announcement Asian trade, with both upside and downside flurries yesterday having proved short-lived . USD-JPY, meanwhile, has continued to orbit the 103.00 level, recovering in Tokyo after orbiting to a distance of 102.50 in New York yesterday. A 2% surge in the Nikkei, apparently made in celebration of the yen maintaining a consolidation at historically weak levels, nor news that Japan posted the biggest trade balance for a November on record, had much impact. Markets are likely to remain somewhat languid into the FOMC decision today as the odds of the Fed announcing the commencement of tapering of QE assets are about the same as a coin flip. AUD-USD managed a lift after RBA Governor Stevens refrained from making dovish remarks when he appeared before parliament today. AUD-USD touched a new trend low of 0.8895 yesterday, and we expect August's three-year low at 0.8850 to fall in time. A note from PIMCO said that the RBA can be expected to leave interest rates low for an extended period.

    [EUR, USD]
    EUR-USD remains at familiar levels in the upper 1.37s after subdued pre-Europe, pre-FOMC announcement Asian trade, with both upside and downside flurries yesterday having proved short-lived. The Market is likely to remain somewhat languid into the FOMC decision today as the odds of the Fed announcing the commencement of tapering of QE assets are about the same as a coin flip. The nine-day low of 1.3709 that was seen last Friday has remained untroubled, however, the euro's recent failures above 1.3800 has painted a technical picture of waning upside momentum, especially with prevailing levels are looking quite stretched above the 50- and 200-day moving averages relative to historical norms. Support comes in at 1.3694-1.3700, the former of which marks last week's low. From the fundamental perspective, ECB President Draghi affirmed the central bank's dovish stance last week, helping offset the central bank's refrain from detailing further non-standard easing measures at the policy meeting earlier in the month, and many analysts are expecting the central bank to commence a QE program next year.

    [USD, JPY]
    USD-JPY has continued to orbit the 103.00 level, recovering in Tokyo after orbiting to a distance of 102.50 in New York yesterday. A 2% surge in the Nikkei, apparently made in celebration of the yen maintaining a consolidation at historically weak levels, nor news that Japan posted the biggest trade balance for a November on record, had much impact. Markets are likely to remain somewhat languid into the FOMC decision today as the odds of the Fed announcing the commencement of tapering of QE assets are about the same as a coin flip. Bigger picture, USD-JPY remains in consolidation after posting a multi-year high of 103.92 on Friday. The pull-back low of 102.50 is marked as a support level. A breach here would present the Dec-11 of 102.15 as the next correction target. EUR-JPY and other yen crosses have been seeing a similar price action. The main risk is that the Fed announces a tapering that triggers a sustained period of risk aversion in markets, a backdrop that would likely generate a recovery in the yen, as short positions would be unwound from the world's funding currency of choice.

    [GBP, USD]
    Sterling trade to a three-week low versus the dollar and a six-week nadir against the euro on Tuesday. The latest down leg was trigged by an unexpected drop in CPI to 2.1% y/y in November, a four-year low and down from 2.2% y/y in October. Follow-through has been limited and we would advise that a bullish view of sterling still remains valid as we see the U.K. economy continuing, for now, as an outperformer in the OECD group. The 18-high in the CBI industrial trends survey for December, is testament to that. While the drop in inflation over the last two months does give the BoE space to pursue its 7% unemployment target, we are likely to see CPI tick back higher in the coming months as the impact of higher gas and electricity prices has yet to be felt due to the relatively late introduction this year of hikes in power tariffs. Initial support in Cable is at 1.6280, ahead of 1.6250. Despite the recent chop we still retain our 1.6500 target.

    [USD, CHF]
    We expect the safe haven Swiss currency to remain broadly underpinned into this week's FOMC meeting in the U.S. as a significant portion of market participants are anticipating the Fed to commence QE tapering, which in the event has the potential to trigger a more sustained period of risk aversion in global financial markets. EUR-CHF breached support is at 1.2200-1.2205 on Tuesday, trading to its lowest level since April, of 1.2166, taking out what had been our initial target at 1.2179, which was the Apr-21 low. On the topside, a mixture of trend and consolidation resistance shows up at 1.2230 and 1.2250 ahead of the 20-day moving average at 1.2258. We don't recommend investors establish EUR-CHF short positions at prevailing levels as we are nearing the levels where SNB intervention would become a possibility.

    [USD, CAD]
    USD-CAD pair is in consolidation mode after some choppy price action since a three-month rally to 1.0708 was see on Dec-6 (which was the highest traded since 2010). Initial target and support is marked at 1.0560, ahead of 1.0550, which roughly markets a series of former daily highs and lows, should be treated as a key risk level. Clear resistance is at 1.0594-1.0600.

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