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By XE Market Analysis August 24, 2017 3:15 am
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    XE Market Analysis: Europe - Aug 24, 2017

    Sterling posted a fresh eight-year low versus the euro during the pre-London session in Asia, and Cable a new eight-week low, at 1.2774. The underperformance of the pound comes after the solid flash August PMI data out of the Eurozone yesterday and ahead of today's second estimate Q2 GDP release out of the UK, which is likely to confirm the preliminary figure of 0.3% q/q growth, which would be half the growth pace of the Eurozone. EUR-GBP's new peak is at 0.9234. Brexit-related uncertainties and concerns, which is having a detrimental affect on business and investment decision making, along with declining real household incomes, have been crimping UK economic performance. Elsewhere, USD-JPY has settled around 109.00, lacking directional bias presently, with a six-week bear phase having lost momentum. EUR-USD has settled around 1.1800, modestly off from yesterday's post-PMI high at 1.1823. Tomorrow's speeches by Fed's Yellen and ECB's Draghi from the Jackson Hole symposium will likely curtail directional impulse in forex markets for now.

    [EUR, USD]
    EUR-USD has settled around 1.1800, modestly off from yesterday's post-PMI high at 1.1823. Tomorrow's speeches by Fed's Yellen and ECB's Draghi from the Jackson Hole symposium will likely curtail directional impulse in forex markets for now. The big questions are whether Yellen will hint at quantitative tightening as soon as September and whether Draghi will show any commitment to policy tapering. What guidance they give will set the foundations for the next directional phase in EUR-USD. We think that still tepid inflationary readings in the Eurozone along with euro strength will stay the hand of Draghi, who will likely keep his rhetorical powder dry. Such an outcome would likely be taken as a cue to sell euros by markets, so we advise caution to EUR-USD bulls. On the dollar side, however, we also expect little new from Yellen as there isn't much new that she could say given the recent update in the FOMC minutes and via Fedspeak and data. On net, we take a moderately bearish view of EUR-USD. Support is at 1.1731-33.

    [USD, JPY]
    USD-JPY has settled around 109.00, lacking directional bias presently. The pair has been in a bear phase for some six weeks, a period of sporadic bouts of risk-off sentiment, which last week produced a six-week low at 108.60, though downside momentum has waned, with declines below 109.00 having since proved fleeting. The 14-day RSI momentum indicator has been showing "bearish divergence" (rising over the last 10 days despite spot making fresh lows), which is taken by technical analysts as portending a trend shift. Much will depend on messages that central bank policymakers give at the Jackson Hole symposium for near-term direction. Assuming we see a collective message of patience with regard to monetary policy normalization, this could be negative for the yen, as such a scenario would like spark a rally in global stock markets. USD-JPY has support at 108.60-63, and resistance at 109.50-52.

    [GBP, USD]
    Sterling posted a fresh eight-year low versus the euro during the pre-London session in Asia, and Cable a new eight-week low, at 1.2774. The underperformance of the pound comes after the solid flash August PMI data out of the Eurozone yesterday and ahead of today's second estimate Q2 GDP release out of the UK, which is likely to confirm the preliminary figure of 0.3% q/q growth, which would be half the growth pace of the Eurozone. EUR-GBP's new peak is at 0.9234. Brexit-related uncertainties and concerns, which is having a detrimental affect on business and investment decision making, along with declining real household incomes, have been crimping UK economic performance. We expect more of the same, and advise a trend-following strategy for sterling.

    [USD, CHF]
    The Swiss franc has firmed up some today after posting new lows versus both the euro and dollar yesterday. We advise caution with regard to EUR-CHF, seeing near-term downside risk as we don't expect to ECB President Draghi to use the Jackson Hole venue as a place to lay the groundwork of QE tapering. The timing remains premature given tepid inflationary pressures and policymaker concerns about the strength of the euro. A lack of committal to tapering would likely be taken as a euro selling cue by markets. In the bigger picture, we remain bullish. 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 (which we think will in Autumn), we expect the EUR-CHF to eventually recover to the SNB's former floor level at 1.2000.

    [USD, CAD]
    USD-CAD has settled to an oscillation of the 1.2550 level, continuing a consolidation that's been since the pair clocked a three-week low at 1.2525 on Monday. We continue to favour the downside, anticipating relative outperformance of the Canadian economy, which we expect to come in at 3.7% q/q (saar) in Q2 and 3.0% for the year. This is coming as the drag from historic low oil prices in recent years having now passed. We expect the BoC to make a second 25 basis point rate hike in October, which would take the policy rate to 1.00%, and we see two more 25 basis point rate increases next year.

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