EUR: Dodging bullets - Rabobank
Jane Foley, Research Analyst at Rabobank, notes that the sell-off in the EUR after the ‘no’ vote in the weekend’s Italian referendum proved to be extremely short-lived. “In the end it wasn’t the result of Italy’s vote that surprised but the extent of Renzi’s failure. Although this may mean that Renzi will not be asked by the President to form a caretaker government, the market has adopted a pragmatic view on the next phase of Italian politics. A caretaker government led by a respected politician is considered the more likely outcome for Italy. While this may not be the best case scenario for any country, this is unlikely to offer a direct threat to Italy’s position in the EMU. The risk of bank contagion still has to be managed and the 2018 elections still suggest the possibility of anti-EMU populist parties claiming more power in Italy. That said, the rejection of Renzi’s constitutional reforms means that the power base remains divided and there is less chance of a ‘strong man’ politician taking the helm. For now it seems that both Italy and EMU will continue to muddle through. Since the level of shorts has been creeping higher in recent months, this view has provided sufficient relief to push the EUR higher.” “Potentially a bigger risk for EMU coherence is next year’s French Presidential election. Polls have been indicating that the populist Far Right leader Le Pen would lose in the second round of the election to the winner of the Republican Party primary. Surprising this has been won by the reformist Fillon whose Thatcherite policies include significant labour market reforms. Although this outcome would be popular with the financial markets, it would mark a significant change for France. Although an opinion poll published by Ifop-Fiducial suggests that Fillon would win 65% of the vote in the second round, many market participants are likely to retain a healthy scepticism of poll given their misleading implications for recent elections both in the UK and in the US.” “As the April/May French elections approach, it is likely that the EUR will adopt a fairly binary relationship with French political news. Indications that Fillon will win are likely to be supportive while a boost to Le Pen’s support are likely to see the EUR softening in view of her calls for a referendum on France’s membership of EMU. The EUR could see some benefit from the Dutch elections on March 15. Although polls are indicating that the current governing coalition is unlikely to return to power, a Eurosceptic coalition seems unlikely and thus the outlook for EMU coherence could be given a boost. While the German elections later in the year could bring increased support to the Far Right, a more liberal governance is currently expected to prevail. This view, however, may be at risk if tensions over the migrant crisis surge again.”“While it is our central view that Euro-scepticism will be kept in check next year, the clear rise of nationalism across Europe and uncertainly connected with next year’s elections suggests that volatility in the EUR is set to remain heightened. The experience of the GBP this year is testament to the potential impact on a currency of political uncertainty. That said, the EUR is likely to exhibit different behaviours to the pound as a consequences of positioning and the Eurozone’s healthy current account surplus.” “Since the market is already short of EURs, it reaction to negative news should be lessened. The fact that the region has a very significant current account surplus (EUR25.3 bln in September) should also provide a cushion. Since it is our central scenario that EMU will continue to muddle through in the coming years and since it is our belief that the market’s US reflation expectations are overdone, we are forecasting EUR/USD at 1.10 on a 12 mth view.”

GBP/USD upside appears limited above 1.2800 UOB
Further gains in Cable appear somewhat limited in the near term, according to FX Strategists at UOB Group. “We noted yesterday that 1.2770 is a major resistance and a sustained move above this level is unlikely. GBP touched a high of 1.2775 before dropping quickly to end the day at 1.2678. The 1.2775 peak is viewed as a short-term top and the current pull-back appears to have scope to extend further but 1.2625/30 is a strong support and at this stage, a clear break below this level seems unlikely”.“The partial profit taking level of 1.2770 that was indicated two days ago was met as GBP touched a high of 1.2775 yesterday. As noted, this is a major resistance and while technically the next resistance is at 1.2865, the odds for further GBP strength are not high. That said, confirmation of a short-term top is only upon a move below 1.2630 (a breach of this level would indicate the start of a consolidation phase)”.

The USD/JPY pair erased all of its early gains
The USD/JPY pair erased all of its early gains and has now dropped back to 114.00 handle, having posted a session high at 114.40.After attracting some buying interest during Asian session, in wake of dovish comments from Deputy Governor Kikuo Iwata, the pair flattened out as investors seemed reluctant to carry big bets ahead of influential central bank monetary policy meetings, ECB on Thursday and FOMC on December 13-14. On Thursday, ECB is expected to extend its bond-buying program. However, a possible signal towards winding down or taper its asset-purchase program is likely to trigger a fresh bout of volatility in the FX market and drive the Japanese Yen's safe-haven demand. On the other hand, the Fed is widely expected to raise short-term rates but investors would be keen to know the pace of Fed's tightening-cycle in 2017, which would eventually determine the next leg of directional move for the greenback and provide fresh impetus for the pair's near-term trajectory.Moreover, the prevalent risk-on mood, as depicted by buoyant European equity market, is driving flows away from traditional safe-haven assets and limiting any immediate downslide. "The ‘golden cross’ - bullish 50-MA & 200-MA crossover - has been confirmed on the daily chart as well as on the monthly chart. However, the ‘golden cross’ is a lagging indicator and is has been observed time and again in the different markets that confirmation (of the crossover) is often followed by a bout of correction. There is a bearish price-RSI divergence on the daily chart as well, which adds credence to the possibility of a correction. The key psychological support of 110.00 could be put to test if the pair closes below 112.00 levels. On the higher side, only a daily close above 115.00 would signal continuation of the rally from November 9 low of 101.20."

EUR/GBP retakes 0.8500 and beyond, weekly tops
The offered bias around the Sterling is allowing EUR/GBP to clinch fresh weekly peaks above the key 0.8500 handle.The selling pressure around GBP has intensified today following disappointing results from UK’s Industrial and Manufacturing Production during October. That, plus a somewhat steady stance around the single currency has propped the upside in the European cross today to levels above the 0.8500 limestone.The cross is so far reverting five consecutive weeks of losses after breaking below the consolidative theme that prevailed during mid-October around the psychological 0.9000 handle, with quite decent support in the 0.8300 neighbourhood.Looking ahead, the next big event facing the cross will be the ECB meeting tomorrow. Consensus remains biased towards some modification of the current QE programme (likely an extension beyond March 2017) among additional measures, although the refi rate and deposit facility rate should stay unchanged.Later in the session, NIESR GDP Estimate is only due.The cross is now advancing 0.75% at 0.8511 and a break above 0.8582 (high Nov.30) would expose 0.8637 (100-day sma) and finally 0.8710 (high Nov.15). On the other hand, the next support lines up at 0.8298 (low Dec.5) followed by 0.8292 (200-day sma) and then 0.8248 (low Jul.14).

USD/CHF mildly positive above 1.0100 handle
The USD/CHF pair was seen oscillating within a tight trading range, with mild positive bias, and struggled to build on Tuesday's recovery move from 3-week lows.Currently hovering around 1.0100 handle, the pair has failed to gain a follow through traction as investors turned cautious ahead of influential central bank monetary policy meetings of ECB and the Federal Reserve, and following the pair's volatile price action since the beginning of current trading week. The pair on Monday reversed sharply and broke below its recent trading range, albeit managed to reverse all of the losses on Tuesday. Looking at the broader picture, the recent price-action could be categorized as near-term consolidative phase before the next leg of directional move.Hence, next week's FOMC meeting will remain on investor radar, which might provide some insight over the Fed's monetary policy stance in 2017 and eventually provide fresh impetus for the pair's near-term trajectory in either direction. Immediate resistance is seems at 1.0120 level above which the pair is likely to aim towards 1.0160 horizontal resistance and the momentum could further get extended towards an important resistance near 1.0180-85 region. On the downside, 1.0080-70 zone now seems to act as immediate support, which if broken is likely to accelerate the slide towards 1.0055-50 important support before the pair eventually drops to retest parity mark.

EUR/PLN finds support around 4.42 post-NBP
The Polish Zloty is sharply higher vs. its European peer today, dragging EUR/PLN to test lows in the 4.4200 area.The upbeat momentum around PLN has picked up extra pace after the Monetary Policy Council of the Polish central bank decided to leave unchanged its Reference Rate at 1.5%, the Deposit Rate at 0.50% and the Rediscount Rate at 1.75%, broadly in line with market expectations.The EM cross has retreated to multi-day lows in the boundaries of the 4.42 area in the wake of the decision, managing to regain some pips soon afterwards although keeping intact the bearish note during the week.At the moment the cross is down 0.60% at 4.4284 facing the next support at 4.4197 (low Dec.7) followed by 4.3989 (low Nov.29) and finally 4.3515 (200-day sma). On the other hand, a breakout of 4.4686 (high Dec.7) would aim for 4.5098 (high Dec.6) and then 4.5391 (high Jun.24).

WTI headed back towards session low, EIA report in focus
WTI crude oil reversed recovery momentum back above $51.00/barrel mark and is now heading back towards the lower end of daily trading range. Currently trading around $50.60 region, the black gold seesawed between tepid gains and minor losses, and was seen struggling for a firm direction, as investors raised skepticism over implementations of last week's OPEC deal to cut its oil production and would actually bring an end to global supply glut, which has been the key factor weighing on oil prices since mid-2014. This coupled with, worries about cooperation from non-OPEC members capped further upside and is exerting some selling pressure following an upsurge of 15% in the aftermath of the post-OPEC deal. A meeting between OPEC and several non-OPEC members is scheduled on Saturday.Later during NY session, the EIA will release its weekly report on domestic crude inventories and is expected to show oil stockpiles fell 1.032 million barrels last week. Meanwhile, API report on Tuesday showed a decrease in oil stocks by 2.2 million barrels and should the official report follow suite, the commodity is likely to catch fresh bids and build on to its last week's strong momentum.Weakness below $50.30 region (yesterday's low) now seems to drag the commodity back below $50.00 psychological mark towards testing an important support near $49.30 region with $49.80 level acting as intermediate support. On the upside, $50.90-51.00 area now becomes immediate hurdle, which if cleared decisively would trigger a fresh bout of short-covering and lift oil prices back towards $51.80-85 resistance area.

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