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By XE Market Analysis August 21, 2017 3:37 am
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    XE Market Analysis: Europe - Aug 21, 2017

    The dollar majors traded without drama during the pre-London open session in Asia. USD-JPY settled to the lower 109.0s after capping out at a 109.42 on Friday, which was seen following a pop higher on the news that Trump advisor Bannon was out (on the view that the executive branch will be left less acutely biased toward trade protectionism). EUR-USD continued to ply a narrow range in the mid 1.17s, holding above the three-week low seen last Thursday at 1.1662. Market participants are keeping a weather eye on the Korean peninsular, with Pyongyang today warning of a "merciless strike" as the U.S. and South Korea prepare for military drills. The upcoming meeting of central bankers at the annual Jackson Hole economic policy symposium (starting this Thursday), is also in focus, especially with major central banks under pressure to unwind ultra-accommodative monetary policy settings. The looming prospect of this event, along with summertime trading conditions in key market centres, suggests there will be limited directional bias in the dollar and other major currencies for now.

    [EUR, USD]
    EUR-USD continued to ply a narrow range in the mid 1.17s, holding above the three-week low seen last Thursday at 1.1662. The upcoming meeting of central bankers at the annual Jackson Hole economic policy symposium (starting this Thursday), is also in focus, especially with major central banks under pressure to unwind ultra-accommodative monetary policy settings. This was the venue that ECB President Draghi laid the groundwork for quantitative easing back in 2014, and this could be the stage where he might detail a tapering of this program. This should keep EUR-USD bid on dips for now, especially with recent data having seen prospects for another Fed rate hike by year end all but disappear, though Jackson Hole will provide Fed chair Yellen a chance to clarify intentions for quantitative tightening. EUR-USD has support at 1.1710-12.

    [USD, JPY]
    USD-JPY settled to the lower 109.0s after capping out at a 109.42 on Friday, which was seen following a pop higher on the news that Trump advisor Bannon was out (on the view that the executive branch will be left less acutely biased toward trade protectionism). Market participants are keeping a weather eye on the Korean peninsular, with Pyongyang today warning of a "merciless strike" as the U.S. and South Korea prepare for military drills. Although markets are well accustomed to these sort of sabre rattling, the stakes seem higher now given North Korea's advancement in ICBM and nuclear technology. This should keep a cap on USD-JPY's upside potential. Resistance is at 109.42 and 109.50.

    [GBP, USD]
    Cable has been plying a relatively narrow range below 1.2900, forays above which in recent sessions have proved short lived. The pairing is in consolidation mode following a two-week bear phase, which yesterday left a five-week low at 1.2841. The pound closed below 1.3012 on Friday, which made last week the third consecutive week of decline. Ditto for the case against the euro, with EUR-GBP, which logged a third straight week of gains. The cross left a 10-month peak on Wednesday at 0.9143 (which is 6 pips from the loftiest level seen since 2010). Over the last month, the pound has fallen by an average 2.7% against the dollar, euro and yen, which has occurred with the UK economy in relative stagnation, associated with Brexit concerns. We continue to take a bearish view of sterling. The UK calendar this week is relatively quiet, highlighted by second estimate Q2 GDP data (due Thursday), which is likely to confirm growth at 0.3% q/q, half the Eurozone growth figure for the same quarter. The August industrial trends and distributive sales surveys are also out from the CBI.

    [USD, CHF]
    EUR-CHF recouped above 1.1300 after logging a three-week low at 1.1259 on Friday, which was seen after the ECB minutes to the August policy meeting revealed policymaker concern about the pace of recent euro gains. EUR-CHF's price action has been tracking EUR-USD ebb and flow, with the cross having made a return as a "normally" trading pairing over the last month. Assuming the Eurozone economic revival remains on track, which would help quell policymaker angst about euro gains, and assuming the ECB commits to QE policy tapering (perhaps at this week's Jackson Hole policy symposium), we expect the EUR-CHF to recover to the SNB's former floor level at 1.2000.

    [USD, CAD]
    USD-CAD has settled near 1.2600 after logging a near three-week low at 1.2557 on Friday, which extended losses that were sparked by last Wednesday's dovish-leaning FOMC minutes. We continue to favour the downside in USD-CAD, anticipating the BoC to make a second 25 basis point rate hike in October, which would take the policy rate to 1.00%. We see two more 25 basis point rate increases next year, a slow-go approach to tightening but one that should keep return the Canadian dollar to fairer values, with the drag from historic low oil prices in recent years having now passed.

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