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By XE Market Analysis February 7, 2019 3:45 am
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    XE Market Analysis: Europe - Feb 07, 2019

    The USD index printed a fresh two-week peak at 96.24, making this the first consecutive day a new high has been made. EUR-USD has concurrently posted a 13-day low, at 1.1355, putting the pair in the lower reaches of the broadly sideways range that's been unfolding for some three months now. Cable has edge out a tow-week low, at 1.2923, and USD-CAD has lifted an eight-day high at 1.3245. USD-JPY has also been buoyant, although remaining below 110.00 and recent highs. The Dollar has continued to benefit from recent strong data, which led Fed Chairman Powell to remark yesterday that the economy is "in a good place." Risk appetite remains limited. Stock markets have been mixed in Asia, while S&P 500 futures are showing a 0.3% decline in overnight trading, after the cash version of the index close out on Wall Street yesterday with a 0.2% decline. The next round of trade talks between the U.S. and China, which take place in Beijing next week, is a major obstacle looming large on the radar screen. These talks will reportedly centre on the sensitive issue of intellectual property, which has been a major sticking point. Markets are somewhat nervous as the U.S., unless there is a breakthrough, is due to significantly hike tariffs on Chinese goods in just a few weeks time.

    [EUR, USD]
    EUR-USD posted a 13-day low, at 1.1355, putting the pair in the lower reaches of the broadly sideways range that's been unfolding for some three months now. The Dollar has continued to benefit from the resonance of last Friday's 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 an unexpected 0.4% contraction in German industrial production in December. This follows data yesterday showing 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 on the British side of the channel, which will have some drag on the continent's side. We expect EUR-USD to see further downside. Resistance comes in at 1.1380-82, and support at 1.1347-50.

    [USD, JPY]
    USD-JPY has been buoyant, although remaining below 110.00 and recent highs. The Dollar has continued to benefit from recent strong data, which led Fed Chairman Powell to remark yesterday that the economy is "in a good place." Risk appetite remains limited. Stock markets have been mixed in Asia, while S&P 500 futures are showing a 0.3% decline in overnight trading, after the cash version of the index close out on Wall Street yesterday with a 0.2% decline. The next round of trade talks between the U.S. and China, which take place in Beijing next week, is a major obstacle looming large on the radar screen. These talks will reportedly centre on the sensitive issue of intellectual property, which has been a major sticking point. Markets are somewhat nervous as the U.S., unless there is a breakthrough, is due to significantly hike tariffs on Chinese goods in just a few weeks time. Any disappointment would likely be a risk-off catalyst, and be a selling cue for USD-JPY.

    [GBP, USD]
    Sterling has come back under pressure as the Brexit countdown continues. On the Brexit front, a Bloomberg article, citing sources, said that the government is not expecting Brussel's to make any concessions with regard to the Irish backstop. This is of course perfectly plausible given the EU's near perfect state of implacability on the Irish issue. European Council President Tusk raised a few eyebrows earlier with a Trumpian-esque rhetorical outburst, saying in a speech that there is a "special place in hell," no less, for "those who promoted Brexit without even a sketch of plan of how to carry it out safely." Parliament is due to vote on the Withdrawal Agreement again next Wednesday, though if there aren't any amendments, as is looking likely to be the case, then the prime minister would most likely call the vote off and return the issue to parliamentary debate. Prime Minister May seems to be happy to up the ante by running down the clock while leaving the threat of a disorderly no-deal Brexit scenario up in the air, perhaps in the hope of forcing a mass acquiescence in Parliament. Ultimately -- and this is likely to be in the EU's calculations, too -- we expect the government/parliament to ensure a no-deal scenario doesn't become a reality.

    [USD, CHF]
    EUR-CHF has sunk to eight-day lows under 1.1375, with the cross tipping lower by the force of broad declines in the Euro as incoming data continue to painting a picture of a stagnating Eurozone economy. Earlier in the week the cross had spiked to a three-month high at 1.1443. The price action continues a phase of relatively high volatility the cross has been experiencing. Since early January 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 eight-day high above 1.3250, extending a recovery from last Friday's three-month low at 1.3068. A turn lower in oil prices this week has seen the Canadian Dollar come off the boil, while the U.S. Dollar itself has been broadly firmer following recent strong U.S. data. The Canadian Dollar still remains up by some 3%, at prevailing levels, against the U.S. buck on the year-to-date. This 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 1.3221-23.

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