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By XE Market Analysis July 2, 2019 4:25 am
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    XE Market Analysis: Europe - Jul 02, 2019

    The Dollar has traded mixed, posting fresh highs versus the Euro and the Pound, but mostly holding narrow ranges during pre-Europe trading in Asia, holding onto gains following the adjustment in Fed easing expectations. EUR-USD edged out a two-week low at 1.1275, and Cable also saw a two-week nadir, at 1.2626. USD-CAD ebbed into the lower 1.3100s after posting a four-session high at 1.3145 late yesterday. Oil prices yesterday scaled to six-week highs, which had given the Canadian currency a lift. USD-JPY has settled in the lower-to-mid 108.0s, holding below the two-week high seen yesterday at 108.53. AUD-USD was choppy, dropping sharply after the RBA cut its cash rate by 25 bp to a new record low of 1.0%, following-up on last months quarter-point cut. The pair printed a low at 0.8956 before promptly rebounding to levels around 0.8980-85. Incoming June services PMI reprots will be in focus today in Europe, while markets will also be anticipating the June U.S. payrolls report, due Friday, which this time around comes with downside risk, which seems to be curtailing follow-through Dollar demand.

    [EUR, USD]
    EUR-USD edged out a two-week low at 1.1275, extending losses amid the abatement in Fed easing expectations following the outbreak of truce on the U.S.-China trade front. This put in some more distance from the one-month high seen last week at 1.1412, and we expect a continued neutral-to-declining bias over the coming phase. Bigger picture, EUR-USD has been in a bear trend since early 2018, though downside momentum has abated markedly in recent months, with the pairing looking to have found a rough equilibrium. Resistance comes in at 1.1344-47.

    [USD, JPY]
    USD-JPY has corrected some from the two-week high seen yesterday at 108.53. Support comes in at 108.04-07.

    [GBP, USD]
    Sterling has made a return to underperforming ways after yesterday's underwhelming UK June PMI data aid bare the impact that prolonged Brexit uncertainty and slowing growth on continental Europe is having on the UK economy. Cable today extended to a two-week low at 1.2617. Given the decamping in Fed easing expectations away from a 50 bp move as soon a next month, the pound is likely to remain downwardly biased against the Dollar, particularly as the big miss in yesterday's release of the June manufacturing PMI survey portends downside risk to Wednesday's release of the services PMI report. We estimate that the UK currency has been trading with a 10-15% trade-weighted Brexit discount since the vote to leave the EU in June 2016, and don't see much scope for this to reverse anytime soon. As for Brexit, the news flow has remains quiet in terms of substantive developments. That will change as soon as the new prime minister, most likely no-deal-Brexit-if-necessary Boris Johnson, takes up the reigns (which should be by mid month). Cable has resistance at 1.2650-52.

    [USD, CHF]
    EUR-CHF has found a footing after coming under signifiant pressure last week in the wake of ECB President Draghi's eyebrow-raising dovish shift last month, which has been the most notable of a growing chorus of dovish voices on the central bank's governing council. The cross printed a 23-month low at 1.1057 before recouping to levels around 1.1100. The advance of the Franc against the Euro will doubtlessly be displeasing to the SNB (the EUR-CHF cross being a good proxy on the Swiss currency's trade weighted value). The SNB restated at its quarterly policy review this month that downside risks to the economy have increased, and that the overall policy setting "remains as expansionary as before." The central bank also nudged its inflation forecast lower, now expecting CPI to average just 0.6% y/y this year, 0.7% in 2020, and 1.1% y/y in 2021. With the ECB increasingly under pressure to ease policy again, the SNB remains eager to counter Franc appreciation, especially against the Euro. Assuming the ECB remains on the path of further monetary policy easing, we would expect EUR-CHF retain a declining bias. The SNB's -0.75% deposit rate and threat of tactical intervention hasn't been sufficient to arrest recent appreciation of the Franc.

    [USD, CAD]
    USD-CAD ebbed into the lower 1.3100s after posting a four-session high at 1.3145 late yesterday. Oil prices yesterday scaled to six-week highs, which had given the Canadian currency a lift. Last week's eight-month low at 1.3059 remain in scope. The pair has support at 1.3128-30, ahead of 1.3080-85.

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