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By XE Market Analysis August 19, 2019 4:00 am
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    XE Market Analysis: Europe - Aug 19, 2019

    The Dollar majors have been plying narrow ranges in early-week trading so far, with principal pairings and associated cross rates showing less than a 0.2% net movement heading into the London interbank open. EUR-USD settled in the upper 1.1100s. The pair was lifted on Friday from levels around 1.1170 by reports that Germany will shift to deficit spending should the country enter recession. EUR-JPY has similarly consolidated Friday's Euro-driven lift; ditto for other Euro crosses. The Yen has been lacking directional impulse, and was unaffected by data showing a slower rate of decline than expected in Japanese export data in July; USD-JPY has seen about a 20-pip chop around the 106.35-40 zone, holding well within ranges seen last week. The Pound, after posting a rare up week last week, has started the new week by posting modest gains, despite the Sunday Times leaking a government document detailing the impact of a no-deal Brexit on the UK economy, which warned of food and medicine shortages, among other potential horrors. Cable printed a high at 1.2171, which is 3 pips shy of the 11-day peak seen on Friday. The market appears to have found an equilibrium of sorts with regard to the pound. While the advent of Boris Johnson becoming prime minister has increased the odds for there being a disorderly no-deal exit of the UK from the EU, it still remains far from being a certainty. A phase of high Brexit drama looms, which will commence when parliament returns from summer recess on September 3. Stock markets in Asia and S&P 500 futures have been in rally mode, with expectations for stimulus presently outweighing fears of recession in some major global economies.

    [EUR, USD]
    EUR-USD settled in the upper 1.1100s. The pair was lifted on Friday from levels around 1.1170 by reports that Germany will shift to deficit spending should the country enter recession. EUR-JPY has similarly consolidated Friday's Euro-driven lift; ditto for other Euro crosses. We have been advocating a bearish view of the pairing given the ECB's course to easing in September and the risk of a no-deal Brexit, which in the event would be detrimental to the Eurozone economy. And while any return of risk-off trading in global markets may initially elicit Dollar selling should it imply a more aggressive Fed easing path, such a backdrop may also increase demand for U.S. Treasuries, being the biggest and most liquid market for risk-free assets in the world, which in turn may buoy the greenback.

    [USD, JPY]
    The Yen has been lacking directional impulse, and was unaffected by data showing a slower rate of decline than expected in Japanese export data in July; USD-JPY has seen about a 20-pip chop around the 106.35-40 zone, holding well within ranges seen last week. The Japanese currency saw bouts of high volatility last week, and will remain prone to directional impulsiveness should there be continued flip-flopping between risk-off and risk-back-on sentiment, which seems likely as hopes for more central bank stimulus vie with fears that a number of major economies are simultaneously heading for recession, and with a number of Dollar-indebted developing-world economies particularly exposed to the shift in the financial cycle.

    [GBP, USD]
    The Pound, after posting a rare up week last week, has started the new week by posting modest gains, despite the Sunday Times leaking a government document detailing the impact of a no-deal Brexit on the UK economy, which warned of food and medicine shortages, among other potential horrors. Cable printed a high at 1.2171, which is 3 pips shy of the 11-day peak seen on Friday. The market appears to have found an equilibrium of sorts with regard to the pound. While the advent of Boris Johnson becoming prime minister has increased the odds for there being a disorderly no-deal exit of the UK from the EU, it still remains far from being a certainty. A phase of high Brexit drama looms, which will commence when parliament returns from summer recess on September 3.

    [USD, CHF]
    EUR-CHF has settled around the 1.0850 mark after printing a fresh 25-mont low at 1.0835 last Thursday amid volatility in equity markets and recession-portending inversions of the U.S. and UK yield curves, which fed safe haven demand for the Swiss currency (despite the punishing -0.75% deposit rate). We retain a bearish view of the cross given ECB's course to additional monetary stimulus in September, and the risk of a disorderly no-deal Brexit on October 31.

    [USD, CAD]
    USD-CAD has settled in the mid 1.3200s after printing a nine-day high at 1.3339 last Thursday, which came amid sharp oil price declines and after above-forecast U.S. retail sales and productivity data. USD-CAD support comes in at 1.3207-10.

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