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By XE Market Analysis August 1, 2019 3:35 am
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    XE Market Analysis: Europe - Aug 01, 2019

    The Dollar extended post-Fed gains during the early part of the Asia session, with the narrow trade-weighted USD index gaining by a cumulative 0.9% in printing a high at 98.92, which is the highest level seen since May 1997. EUR-USD concurrently fell to a fresh 27-month low at 1.1034 while USD-JPY lifted to a two-month peak at 109.32. The Fed delivered the expected 25bp rate cut, its first easing in a decade, but disappointed markets by characterizing it as only a "mid-cycle adjustment" while signalling that this was not the start of a new monetary easing cycle, although will remain ready to "act as appropriate to sustain the expansion." What was good for the dollar wasn't good for stock markets. The S&P 500 finished 1.1% for the worse on Wall Street yesterday, with futures moderately extending losses in overnight trading. The MSCI Asia-Pacific (ex-Japan) index shed over 0.5% in making six-week lows. An 11% y/y drop in South Korean exports in July raised eyebrows, being the eighth consecutive decline and given that South Korea is the world's sixth-biggest exporter and the first major industrialized nation to release monthly trade figures. This comes with Seoul and Tokyo at loggerheads in a trade dispute, and with the U.S. and China yesterday finishing the latest round of trade talks with little sign of progress. Elsewhere, the Brexit-afflicted Pound has managed to hold above recent trend lows versus the Euro, Yen and other currencies, but saw a 30-month low against the Dollar, at 1.2101.

    [EUR, USD]
    EUR-USD fell to a fresh 27-month low at 1.1034. While the Fed delivered the expected 25bp rate cut, its first easing in a decade, it disappointed markets by characterizing it as only a "mid-cycle adjustment" while signalling that this was not the start of a new monetary easing cycle, although will remain ready to "act as appropriate to sustain the expansion." With the ECB geared-up for a policy easing in September, and with the upped risk for a no-deal Brexit scenario, we expect EUR-USD will remain directionally biased to the downside. Trend support comes in at 1.0982-84, and resistance at 1.1120.

    [USD, JPY]
    USD-JPY lifted to a two-month peak at 109.32 after the Fed signalled that its first-in-a-decade rate cut yesterday was not the started of a new monetary easing cycle. This sets the pairing up for its second consecutive up week, which would be the fourth weekly gain out of the last six weeks, having risen from a seven-month low at 106.77. A revisit of territory above 110.00 level looks likely.

    [GBP, USD]
    The Brexit-afflicted Pound has managed to hold above recent trend lows versus the Euro, Yen and other currencies, but saw a 30-month low against the Dollar, at 1.2101. Market narratives appear to be acknowledging that the parliamentary arithmetic in the UK means that, with the government having a working majority of just two seats (and likely to drop to just one after a by-election today), Boris Johnson is in a weak position to pull-off a no-deal exit from the EU, given there are a number of his own Tory party members, some of which are vengeful after Johnson's brutal cabinet reshuffle, who might vote against their own government in the event that the Labour opposition tables a confidence motion against the government before the October-31 deadline. Also, there are arguments that Boris and his Brexiteer cabinet will not want to give up position and power by risking a no deal, or a snap general election that could backfire given the strength of support for the Brexit Party. Boris may instead look to find a face-saving means of exiting the EU in a political sense on October 31 while remaining in the single market and customs union for a timetabled multi-year period to negotiate new agreements with the EU, which is something Brussels may be happy to concede to if it takes the no-deal risk off the table.

    [USD, CHF]
    EUR-CHF ebbed to a one-week low at 1.1002, retracing over half of the rally seen last week after the ECB refrained from hitting the rate-cut button. The cross, which is sensitive to ECB policy, left a recovery high of 1.1063 after seeing a 24-month low at 1.0962. We still anticipate EUR-CHF to remain biased lower as the ECB shifted to an explicit easing bias, laying the groundwork for a comprehensive set of easing measures in September. The risk of a disorderly no-deal Brexit on October 31 is also in the mix, which is a bearish factor for the cross.

    [USD, CAD]
    USD-CAD rallied to a near six-week high at 1.3219, snapping a run of of third straight days of lower lows, which left a 10-day low at 1.3105. Given the Fed's refrain from signalling an easing cycle, and given the risk-off impact in global asset and commodity markets, we expect further upside in USD-CAD. Support comes in at 1.3135-37.

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