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By XE Market Analysis April 17, 2018 3:02 am
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    XE Market Analysis: Europe - Apr 17, 2018

    A dollar softening theme has been prevailing, with EUR-USD printing a three-week high just above 1.2380 and USD-JPY pushing to three-day lows below 107.00. AUD-USD has also turned higher after weakening in the wake of the release of the RBA's minutes to its April policy meeting, which was deemed as showing board members as being relatively less optimistic on the economy than before, helping cement the view that the central bank will likely be on hold through to 2019. There was a mix of other news, including as-expected GDP data out of China, of 6.8% y/y in Q1, an unexpected downward revision in the final release of Japanese February industrial production, to 0.0% m/m from the preliminary estimate of 4.1% m/m, and a report that North and South Korea are apparently set on discussing an official end to the war. Market participants are also gearing up for the meeting between Trump and Abe this week, which is expected to be conciliatory in tone as Trump's face-to-face meetings with world leaders tends to be, especially with his softening tone on trade with China and NAFTA. Elsewhere, Cable has punched out a fresh post-Brexit vote high above 1.4350, today marking the seventh consecutive higher high with markets expecting a perky wages reading in today's labour market report, which along with tomorrow's inflation data should seal expectations for the BoE to hike in May.

    [EUR, USD]
    EUR-USD has printed a three-week high near 1.24000 on a generally softer dollar. In the bigger view, EUR-USD remains near the midway levels of a broad consolidation range that's been seen for some two months now, which has followed a 14-month rally phase from sub-1.0500 levels. More of the same seems likely, with the odds for a big-picture breakout seeming low at the present time.

    [USD, JPY]
    USD-JPY has drifted moderately lower, as have EUR-JPY and other yen crosses today. USD-JPY edged out a three-day low of 106.97. There was a mix of news, including as-expected GDP data out of China, of 6.8% y/y in Q1, an unexpected downward revision in the final release of Japanese February industrial production, to 0.0% m/m from the preliminary estimate of 4.1% m/m, and a report that North and South Korea are apparently set on discussing an official end to the war. Market participants are also gearing up for the meeting between Trump and Abe this week, which is expected to be conciliatory in tone as Trump's face-to-face meetings with world leaders tends to be, especially with his softening tone on trade with China and NAFTA. We see near-term risks as being to the downside for USD-JPY, with momentum indicators now turning lower following a three-week rally phase from levels in the mid-104.00s. Resistance is at 107.16-18, and support is at 106.65.

    [GBP, USD]
    Cable has punched out a fresh post-Brexit vote high above 1.4350, today marking the seventh consecutive higher high with markets expecting a perky wages reading in today's labour market report, which along with tomorrow's inflation data should seal expectations for the BoE to hike in May. This is now the fifth week out of the last six week Cable has posted higher highs, and the pound is showing an average gain of over 3% against the G3 currencies on the year-to-date. Data this week includes the aforementioned labour data today and inflation figures tomorrow, and retail sales figures are up on Thursday. The UK's upper house will also be debating the Brexit bill on tomorrow. Many market participants will be looking to the data to cement expectations for the BoE to make a second-in-the-cycle repo rate hike in May, to 0.75%. We expect March CPI to remain at 2.7% for a second month, above the BoE's 2.0% target, and the unemployment rate to remain at the multi-decade 4.3% low. Cable has trend support at 1.4226-28.

    [USD, CHF]
    EUR-CHF has logged a new 39-month high, at 1.1897. A background support for the cross is the widespread expectation for the SNB to remain strongly committed to negative interest rates, until after the ECB starts tightening. SNB board member Maechler recently bemoaned a still "highly valued" currency and argued that premature tightening in monetary policy would be counterproductive. EUR-CHF has rallied nearly 11% from mid last year. We have a long standing target for the cross to return to the 1.2000 level, which was the SNB's cap that was abandoned back in January 2015.

    [USD, CAD]
    USD-CAD remained heavy after posting a two-month low last Wednesday at 1.2544. A 8% surge in oil prices over the last week to 40-month highs has given the Canadian dollar a boost, helping offset disappointment from the news that an announcement on the NAFTA renegotiation will be delayed. The latest price action in USD-CAD affirms a downside trend that's been developing over the last three weeks, from levels above 1.3100, and we expect more downside. Initial resistance is at 1.2574-75. The BoC meets on policy this week (announcing Wednesday). Our projection remains for no change to the 1.25% rate setting, along with a cautiously constructive growth outlook salted with trade uncertainty. An as-expected outing would maintain the base-case for further gradual rate hikes this year. The BoC will also release the Monetary Policy Report. GDP is on track to undershoot the BoC's 2.5% estimate in Q1 (we see +1.5%), so it will be interesting to see how they view growth prospects for this year and next.

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