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By XE Market Analysis July 3, 2019 3:56 am
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    XE Market Analysis: Europe - Jul 03, 2019

    The Dollar has traded mixed while the Yen has traded firmer versus the other main currencies, which has come amid a backdrop of drooping stock markets in Asia (event though the S&P posted a fresh record closing level) as optimism about the U.S.-China trade war truce faded. For one, the U.S. Trade Representative's office announced an expanded list of European products that could be subject to tariffs. For two, as we an others had pointed out, fundamental difference around industrial strategy and national security issues remain, and with 11 rounds of trade talks having come and gone, it remains unclear whether a new round of talks will produce a breakthrough. In the mix of sentiment drivers are yesterday's mostly sub-forecast manufacturing sector PMI data releases from Asia and Europe. EUR-USD has remained heavy in the upper 1.1200s, holding so far above yesterday's low at 1.1275. News that IMF's Lagarde will become the new head of the ECB, replacing Mario Draghi, caused Euro selling given her evidently dovish-leaning bias. USD-JPY extended to a one-week low, at 107.53. Most Yen crosses also traded lower as the Yen picked up a degree of safe-haven demand as stock markets headed south in Asia. Sterling underperformed following dovish remarks from BoE Governor Carney, late yesterday. Cable printed a 12-day low at 1.1263, while EUR-GBP inched nearer to six-month high territory.

    [EUR, USD]
    EUR-USD has remained heavy in the upper 1.1200s, holding so far above yesterday's low at 1.1275. News that IMF's Lagarde will become the new head of the ECB, replacing Mario Draghi, caused Euro selling given her evidently dovish-leaning bias. 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 extended to a one-week low, at 107.53. Most Yen crosses also traded lower as the Yen picked up a degree of safe-haven demand as stock markets headed south in Asia. This was seen as a consequence of fading optimism about the U.S.-China trade war truce. For one, the U.S. Trade Representative's office announced an expanded list of European products that could be subject to tariffs. For two, as we an others had pointed out, fundamental difference around industrial strategy and national security issues remain, and with 11 rounds of trade talks having come and gone, it remains unclear whether a new round of talks will produce a breakthrough. USD-JPY has resistance at 108.04-07.

    [GBP, USD]
    Sterling made a return to underperforming ways after much worse than expected manufacturing and construction PMI data, which were followed-up by some dovish remarks from BoE Governor Carney late yesterday. Cable printed a 12-day low at 1.1263, while EUR-GBP inched nearer to six-month high territory. The PMI data laid bare the impact that prolonged Brexit uncertainty and slowing growth on continental Europe is having on the UK economy. Markets will be looking to today's services PMI release, mindful of downside risk. We are forecasting a decline to 50.5 (median 50.6) after May's 51.0 reading. A sub-50.0 outcome would suggest the UK economy is headed for recession. 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 1.2610-13.

    [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 has rooted in a consolidation around 1.3100-50, which follows a period of sharp declines from the late-May high at 1.3565. A combo of rallying oil prices and rising Fed easing expectations had driven the decline. This two forces have now abated substantially (oil prices are down nearly 6.5% from Monday's highs), and we expect the pairing to remain underpinned over the next phase. This should keep USD-CAD's eight-month low seen last week at 1.3059 out of reach for now. Support comes in at 1.3128-30.

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