FX Daily Strategy: Europe, November 26th

The economics calendar for Tuesday is relatively empty and suggest major movement in the FX market will be headline and flows driven. There are a few potential market moving headlines in the pipeline, namely Trump's policy and geopolitical tension. Trump's policy will have global impact even before his execution of it as no one would to call him bluffing but instead prepare for the worst. So far, there has not been much announcement, yet NATO, tariffs, military and environmental co-operation with Europe and his stance towards the Ukraine-Russia war will sway the market if commented on. On the other hand, we have not heard much more from Russia after the West allowed Ukraine to strike target inside Russia. The market has not priced in anything, given the cheerful mood in U.S. equities, and would be susceptible to any sings of escalation.

The one way traffic anticipating Trump's victory and post his victory has not met much resistance, but is it overdone? Given the current inflation dynamics, it is hard to see the Fed to change trajectory unless Trump exert political pressure, which even to Trump, would be an overstep. However, the Fed may forced to pause its current path if Trump goes with an extreme tariff policy and drove price much higher from other countries retaliation. Such anticipation seems to be overdone for Trump's aggressive policy will likely be well targeted after his first term and should backfire less, but not none to the U.S. economy. 

On the chart, cautious trade has given way to a sharp reactive break above 107.15/35 to post fresh 2024 year highs, with prices reaching 108.07 before settling into consolidation just above 107.15/35. Daily readings have ticked higher and broader weekly charts are improving, highlighting room for further strength. But a close above 107.15/35 is needed to turn sentiment positive and extend September gains towards 108.07. A further break above here will open up the 109.00 retracement, where flat overbought weekly stochastics are expected to prompt fresh selling interest. Meanwhile, support remains at congestion around 106.50. An unexpected close beneath here will turn sentiment neutral and put focus on the 106.00 break level.

Despite in a medium run we favor more JPY strength based on yield differential, it is hard to see a trigger to that leg with Ueda cuing the BoJ to hike in the December meeting. The BoJ has been moving slower than they suggest in the July meeting as they patiently wait for the political change and wage to show sustainable growth. With inflation flaring up, December would be a good window for the BoJ to follow through on their hawkish stance but the BoJ has also been on the surprise side so it is hard to give a concrete call. The other possibility for JPY to strength significantly is risk aversion. The U.S. equities has been too cheerful for a while and any major correction cannot be ruled out. Haven bids for JPY will surface if we see such scenario.

On the chart, the pair is weighing on the 154.00 level and consolidation here see scope for break to open up the 153.28 low of last week to retest. Daily studies have turned down from overbought readings and suggest scope for break of the latter will turn focus lower and extend pullback from the 156.75 high to retrace strong gains from the September year low. Lower will see room to the strong support zone at the 152.00 congestion and 151.28, 6 Nov low. Meanwhile, resistance is lowered to 154.70/155.00 area which is expected to cap and sustain losses from the 156.00 level and 156.75 high.