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By XE Market Analysis February 1, 2019 3:37 am
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    XE Market Analysis: Europe - Feb 01, 2019

    The Dollar has found its feet, holding steady-to-firmer against the other main currencies so far today after dropping sharply during the prior 24 hours in the wake of the Fed's dovish turn. EUR-USD has lodged in the low-to-mid 1.1400s, below its post-Fed high at 1.1514, while USD-JPY has parked in the upper 109.0s, comfortably above the two-week low seen the day before at 108.49. Cable, meanwhile, edged out a two-day low, at 1.3077 following a bout of Sterling selling during the late Tokyo AM session. The pair has since settled back around the 1.3100 mark. AUD-USD also printed a two-day low, at 0.7236, putting in some distance from the eight-week high seen yesterday at 0.7295. On the news front, the U.S. and China reportedly made substantial progress in trade talks, and President Trump said he will meet with China's Xi soon to try an seal a deal. Market participants are also eying today's release of the January payrolls report out of the U.S., which will be subject to distortion, though some economists, including ourselves, are still expecting an overall solid report. We expect a 200k headline gain, while the median forecast is for a 165k gain. This would follow December's solid 312k rise. Anything at or above the median, depending on back revisions, would be taken as a tonic at a time of increasing uncertainty about the U.S. and global economic outlook. This narrative is helping shore-up the Dollar.

    [EUR, USD]
    EUR-USD has lodged in the low-to-mid 1.1400s, below its post-Fed high at 1.1514. The U.S. and China reportedly made substantial progress in trade talks, and President Trump said he will meet with China's Xi soon to try an seal a deal. Market participants are also eying today's release of the January payrolls report out of the U.S., which will be subject to distortion, though some economists, including ourselves, are still expecting an overall solid report. We expect a 200k headline gain, while the median forecast is for a 165k gain. This would follow December's solid 312k rise. Anything at or above the median, depending on back revisions, would be taken as a tonic at a time of increasing uncertainty about the U.S. and global economic outlook. This narrative is helping shore-up the Dollar. EUR-USD has resistance at 1.1470, and support at 1.1420.

    [USD, JPY]
    USD-JPY has parked in the upper 109.0s, comfortably above the two-week low seen the day before at 108.49. The Yen is trading firmer against the Euro and Aussie Dollar, among other currencies. The U.S. and China reportedly made substantial progress in trade talks, and President Trump said he will meet with China's Xi soon to try an seal a deal, though this wasn't enough to lift stock markets in Asia following a fall in China's Caixin manufacturing PMI, to 48.3 in January from 49.7 in December, the lowest figure since 48.0 in February of 2016. Market participants are also eying today's release of the January payrolls report out of the U.S., which will be subject to distortion, though some economists, including ourselves, are still expecting an overall solid report. We expect a 200k headline gain, while the median forecast is for a 165k gain. This would follow December's solid 312k rise. Anything at or above the median, depending on back revisions, would be taken as a tonic at a time of increasing uncertainty about the U.S. and global economic outlook. This narrative is helping shore-up the Dollar.

    [GBP, USD]
    Cable edged out a two-day low, at 1.3077 following a bout of Sterling selling during the late Tokyo AM session. The pair has since settled back around the 1.3100 mark, below the post-Fed high at 1.3160. The Pound has concurrently lifted out of one-week lows versus both the euro and yen. We estimate that the UK's currency is trading at a near 13% discount in trade-weighted terms since the vote to leave the EU in June 2016, recovering from about a 15% discount at December lows. This is reflected in the 3% gain the pound is registering against the Dollar on the year-to-date, and the respective 3.0% and 2.3% advances sterling has posted versus the Euro and Yen over the same period. The gains have been concomitant with a shift in the perceived odds for a no-deal Brexit versus the perceived odds for other scenarios, ranging from an exit with a deal and multi-year transition period to a Brexit-cancelled scenario (which would be possible if there were to be another referendum). The prime minister and her allies have been utilizing the threat of a chaotic no-deal exit for negotiating leverage, but it's reasonable to think that she -- who voted for the UK to remain in the EU at the referendum in 2016 -- and the vast majority of members of parliament will ultimately ensure a no-deal scenario doesn't become a reality. Unless the EU concedes on the Irish backstop (very unlikely), or unless Parliament musters up sufficient consensus for an alternative Brexit plan, which would necessarily be of the softer variety (possible), a new referendum would be the most likely destination. Speculators, eying potential for a 10%-odd rally in the pound, will be watching for the moment that a no-deal Brexit is concretely table off the table.

    [USD, CHF]
    EUR-CHF has settled back in the upper 1.1300s after yesterday clocking an 11-week high at 1.1429. The price action extends a phase of relatively high volatility that the franc has seen, which has been through several periods of pronounced underperformance over the last month, and which have often been accompanied by talk/suspicions of SNB intervention. SNB Chairman Jordan said last week that "current monetary policy is the right one and we will continue to with it for some time." He said that for 2019 the biggest concerns are "political mistakes," pointing to the U.S.-China trade war and "Brexit and the European situation." Jordan also expressed concern about further safe-haven driven franc appreciation, "especially" in a no-deal Brexit scenario. SNB vice president, Zurbruegg, also said last week that the franc "remains highly valued" and the situation on foreign currency markets is "still fragile" and that the SNB's two pillar strategy of negative interest rates and ad-hoc currency interventions, or threat thereof, "remains appropriate."

    [USD, CAD]
    USD-CAD has consolidated around the 1.3150 mark after printing a near three-month low at 1.3118 on Wednesday. The combo of the Fed's dovish turn and higher oil prices has been bearish fodder for USD-CAD. Resistance comes in at 1.3209-10, and support at 1.3065-67. Today's Canadian calendar is empty, but market participants will be eying today's release of the January payrolls report out of the U.S., which will be subject to distortion, though some economists, including ourselves, are still expecting an overall solid report. We expect a 200k headline gain, while the median forecast is for a 165k gain. This would follow December's solid 312k rise. Anything at or above the median, depending on back revisions, would be taken as positive for the U.S. Dollar.

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