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By XE Market Analysis February 22, 2018 3:28 am
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    XE Market Analysis: Europe - Feb 22, 2018

    The dollar has continued to mostly trade firmer, this time amid a backdrop of fresh equity market declines on Wall Street and in Asia (which the exception of Chinese markets, which have been playing catch-up following the prolonged Lunar New Year break). This followed minutes of the FOMC meeting, where bullets about upside risk to growth following the tax cuts, grabbed market attention and sent U.S. Treasury yields higher. EUR-USD logged a 10-day low of 1.2259. Cable and AUD-USD saw a similar dynamic, while the dollar also posted gains versus most newly developed and developing world currencies. USD-JPY was an exception in the firmer dollar theme, with the pair seeing a low of 107.15 in Tokyo (just ahead of the fixing) before settling around 107.50. The dip reflected a broader bid in the yen, with similar price action being seen in EUR-JPY and other yen crosses. Japan's vice minister of finance for international affairs (the power position regarding forex intervention decisions), Asakawa, spoke of the yen for a second straight day, this time saying that the BoJ's monetary policy isn't aimed at weakening the yen. Yesterday said "I cannot help but assess that the yen movements as one-sided."

    [EUR, USD]
    EUR-USD extended lower for a fifth consecutive session, logging a 10-dya low of 1.2259, which extends the correction from the 38-month high seen on Friday at 1.2556. Trend support draw from the daily low points of this nascent down trend comes in at 1.2232-33, and resistance at 1.2339-40. The day's low was seen following the release of the FOMC minutes to the late January policy meeting, which showed a fairly balance view but was highlighted by the Fed's emphasis on upside growth risks following the tax cuts. We expect the prevailing down phase in EUR-USD will persist as markets are putting focus on the spike in U.S. Treasury yields following last week's perkier than anticipated CPI data out. Last week's low at 1.2206 provides downside target.

    [USD, JPY]
    USD-JPY has traded softer today following four straight up days. The move reflects a broader bid in the yen, with similar price action being seen in EUR-JPY and other yen crosses. USD-JPY clocked a low of 107.15, about 40 pips below yesterday's New York closing level. The movement has been concomitant with a weakening in global stock markets (which the exception of Chinese markets, which have been playing catch-up following the prolonged Lunar New Year break). There has also been talk of Japanese repatriation flows ahead of the fiscal year-end at the end of March, while revved up expectations for Fed tightening in the wake of last week's perky U.S. CPI data is seen, at least by some, as a likely cause of fresh global market volatility, which would be supportive of the yen. Japan's vice minister of finance for international affairs (the power position regarding forex intervention decisions), Asakawa, spoke of the yen for a second straight day, this time saying that the BoJ's monetary policy isn't aimed at weakening the yen. Yesterday said "I cannot help but assess that the yen movements as one-sided," USD-JPY has support at 107.10-12.

    [GBP, USD]
    Cable has been tracking EUR-USD direction, trading lower in the face of a generally firmer dollar amid rekindled expectations for Fed tightening. Cable logged an eight-day low at 1.3870 today, putting in some distance from last week's peak at 1.4145. With market narratives focusing on Fed tightening, we expect there is more downside to come for Cable. Support is at 1.3778-80. BoE's Carney said markets are correctly discounting rate hike prospects, in remarks made during parliamentary testimony yesterday. Sterling markets are discounting just over a 50% probability for a 25 bp rate hike at the May Monetary Policy Meeting, according a figure cited by the FT. Carney repeated that the BoE does not commit to a path and refrains from giving guidance on a specific path except in the most exceptional of circumstances. He justified the hawkish shift the BoE took at its February policy review and inflation report as reflecting a "substantially" diminished trade off between slack in the economy and inflation above target. On Brexit, Carney said that there will be some "very big developments" this year on the future relationship with the EU which will impact expectations of households and businesses and, therefore, on the economic outlook, saying that "monetary policy is nimble, it will react to those expectations."

    [USD, CHF]
    EUR-CHF has been in consolidation mode in the mid 1.1500s over the last week after breaking lower in the week before, when a four-month low at 1.1446 was seen. The revival in risk appetite has helped prop up the cross.

    [USD, CAD]
    USD-CAD clocked a two-month high of 1.2717, with the pairing being buoyed by a generally firmer tone in the U.S. dollar and a soft oil prices. Technically, USD-CAD price action has been bullish since early February by Dow theory's higher highs and higher lows yardstick, while momentum indicators suggest that the uptrend is not so far looking stretched (the 14-day RSI reading is presently at 62.4). Support is at 1.2622-24. Some key Canadian data releases are looming, with retail sales up today and inflation data up tomorrow. We expect retail sales to dip 0.3% m/m in December on the heels of the tepid 0.2% gain in November. The ex-autos sales aggregate is projected to decline 0.2%. As for CPI, we project a 0.4% m/m rebound in January after the 0.4% drop in December, while the y/y figure is seen slowing to a 1.5% y/y pace from 1.9% y/y on the back of a well documented base effect after a one-off elevation in prices in January of 2017. Average weekly earnings are also due on Friday, where we expect a 0.3% m/m rise in December.

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