FX Update – USD continues to ease


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By: Stuart Cowell

USDindex, H1

The dollar majors have been seeing typically narrow early-week ranges in quite year-end-approaching conditions. The narrow trade-weighted USD Index (DXY), at 96.97, was showing a 0.2% decline heading into the London interbank open, correcting about half the gain seen on Friday. The Index has been trending lower over the last two weeks, producing a five-and-a-half-month low last Thursday, at 96.59. The decline came amid a backdrop of rallying global stock markets, and associated gains in the Canadian Dollar and other commodity currencies, along with advances in Sterling and the Euro, as risks for a disorderly Brexit scenario evaporated. The optimism of this period proved to be justified, with the phase-1 trade deal between the US and China having been “totally done” (in the words of US Trade Representative Lighthizer), and with UK prime minister Johnson having gained a strong mandate to implement his Brexit deal with the EU after his Conservative Party won a commanding majority in the UK election last week.

This should leave markets to establish the Dollar at softer levels versus most currencies. The week ahead is packed with data releases, and the BoE and BoJ are meeting on policy this week, where both are expected to leave prevailing rates and settings unchanged. Several Asian central banks other than the BoJ meet this week, and all are expected to leave policy unchanged. US data releases should endorse the Fed’s decision to pause on policy after trimming rates three times this year. Focus will be on New Zealand data following strong New Zealand Dollar outperformance since early November after the RBNZ shifted gears. Australian employment data will also be a highlight. Preliminary December PMI data will be the prime focus in Europe, where expectations are for slightly firmer headline readings out of both the Eurozone and the UK.

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