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By XE Market Analysis February 6, 2019 4:14 am
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    XE Market Analysis: Europe - Feb 06, 2019

    The Dollar has continued to trade mostly firmer, although has lost ground today to the Yen, which has outperformed. President Trump's State of the Union, replete as it was with self-backslapping, left markets somewhat cold, with what hopes there were for something specific on progress being made in the trade talks with China having been deflated. The next round of senior-level discussions between the U.S. and China are due to start next week in Beijing, where the focus will be on intellectual property. Markets are somewhat nervous as the U.S. is due to significantly hike tariffs on Chinese goods in just a few weeks time. EUR-USD posted a 12-day low at 1.1380, and Cable a two-week low at 1.2926. The biggest mover by far has been AUD-USD, which plummeted by over 1.3% in making a 12-day low at 0.7133. The losses were sparked by RBA Governor Lowe, who seemed to walk back his post-policy meeting statement of yesterday, which had disappointed markets by failing to follow the Fed's dovish turn. During a speech in Sydney earlier, Lowe corrected this by stating that "over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced." This chimed with prevailing sentiment in Australian markets, where narratives are focused on the risks of a slowing Chinese economy and the recent ascent in AUD-USD (Australian exports being largely priced in U.S. Dollars), and tumbling property prices. Elsewhere, USD-JPY ebbed back to a two-day low at 109.66.

    [EUR, USD]
    EUR-USD posted a 12-day low at 1.1380, driven by a broadly firmer Dollar, which is still benefitting from the continued resonance of the strong January employment report, and other data, which have collectively seen market participants reappraise the Fed's policy pause. Incoming data on the Eurozone side of the pound, meanwhile, has been painting a picture of slowing momentum, the latest being a 1.6% m/m drop in December Germany manufacturing orders. Brexit uncertainty is also in the mix, which January PMI reports evidenced as having a material impact on economic activity. We expect EUR-USD to see further downside. Support comes in at 1.1360-62, and resistance at 1.1410-12.

    [USD, JPY]
    USD-JPY ebbed back to a two-day low at 109.66, driven by Yen outperformance amid a backdrop of lacklustre stock market performance in the wake of President Trump's underwhelming State of the Union address, which lacked an specific fresh insight on U.S.-China trade relations. USD-JPY looks likely to continue lower for now. Resistance is at 109.90-92, and support comes in at 108.90-91.

    [GBP, USD]
    Sterling came under pressure over the last day on the back of weak UK data -- data showing unambiguous evidence that Brexit uncertainty is affecting business activity. Cable has printed a two-week low at 1.2924, which is the culmination of four consecutive down days. The UK's January services PMI, released yesterday, dove to 50.1, down from 51.2 in December and indicating near stagnation in the UK's big service sector. The outcome was the weakest since July 2016 and the second weakest since December 2012. New orders contracted for the first time in two-and-a-half years, and employment fell for the first time since December 2012. Respondents overwhelming linked the slowdown in business activity to heighted Brexit-related political uncertainty. The composite PMI reading fell to 50.3, showing a significant deceleration in economic activity and pointing to risk of negative growth in the UK over the coming months. On the Brexit front, the government is still brainstorming "alternative arrangements" for the Irish backstop, but this looks like a forlorn effort with the EU remain in flat opposition to reopening negotiations. We retain a near-term bearish view of the pound, though see scope for a potentially strong rally should a no-deal Brexit be concretely ruled out (which we expect, although it may be a while yet time in coming).

    [USD, CHF]
    EUR-CHF settled back near 1.1400 after yesterday spiking to a fresh three-month high at 1.1443, the latest spell of relatively high volatility the cross has been experiencing since early January. Over this period, there have been several bouts of pronounced underperformance in the Swiss franc, often accompanied by talk/suspicions of SNB intervention. SNB Chairman Jordan said recently 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 month 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 lifted to a one-week high at 1.3199, extending a recovery from last Friday's three-month low at 1.3068. A turn lower in oil prices have helped the Canadian Dollar come off the boil, while the U.S. Dollar itself has been broadly firmer following recent strong U.S. data (particularly last week's January U.S. employment numbers). The Canadian Dollar still remains up by some 3.3%, at prevailing levels, against the U.S. buck on the year-to-date. This dynamic has been concomitant with the 20%-plus gain seen in oil prices over the same period. Sustain gains in crude prices are a boon to Canada's terms of trade. USD-CAD has support at 1.3148-50, and resistance at 1.3221-23.

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