We’re entering into the last two weeks of the trading year and with markets closed at times and thinner volumes traded with fewer market participants, traditional analysis can go out the window and we can see out of the ordinary moves on lower volume flows. Especially when we look at currencies going into the last few days of the year, we can see larger swings around year end rebalancing so ensuring your risks are properly covered in this period is essential.
On Friday we saw strong USD demand as the greenback continued its recovery from Wednesday’s post FOMC sell off. We highlighted on Thursday that the dollar had space to run higher after the reactionary sell off to a “dovish hike” from the Fed. Focus is now back on US policy and real data as we now look at the new Fed Chair Jerome Powell and how he see’s monetary policy going forward.
Back to Europe and focus rarely slips too far away from Brexit talks. Friday saw both EUR and GBP under pressure from the stronger USD, while on Friday the euro was slightly firmer vs GBP, the pair still holding a tight range however. Broadly risk appetite remains well supported and we have traditionally seen major indices trade higher into the year end, this appears to be the case once more as Friday saw major indices in the US press new highs, while overnight in the Asian session we saw Japanese stocks up over 1% and we were greeted with a sea of green when European bourses opened this morning.
Eurozone CPI inflation highlights the European calendar this morning although very little shift is expected with inflation holding at 1.5%. Given last week’s ECB meeting and a rather downbeat outlook on inflation we’d be surprised to see an upside beat here and that potentially puts euro at risk of a weaker reading. EURUSD continues to find support back towards 1.1730 area, we really need to see a breakdown back below 1.1700 to have real confidence in a move lower. And rally higher has found some light selling just above 1.1800, but 1.1862 should prove harder to break above. EURGBP range remains .8730 to .8870, only a break either side will see some continuation.
Attention today will more than likely be on the US where markets are expecting to see a vote on the US tax bill. There has been an ongoing battle for tax reform in the US but one would feel that it has all but been priced in, that being said given the slightly weaker start to the week for USD, we could get a slight relief rally should it pass. There is very little in terms of major data until Thursday from the US so tax will more than likely be the primary focus for most of the week. GBPUSD holding higher range with support around 1.3300 area, however last week any press above 1.3400 ran into selling.