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By XE Market Analysis July 4, 2019 3:58 am
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    XE Market Analysis: Europe - Jul 04, 2019

    The Dollar majors have maintained narrow ranges so far today, with the U.S. currency lifting out of brief declines during the Asia session. EUR-USD dipped back to the 1.1280 area after earlier pressing to a 1.1295 high, leaving yesterday's peak at 1.1311 unchallenged. USD-JPY remained within the range seen yesterday, still buoyant but bereft of impetus for a challenge of yesterday's high at 107.88. Most Yen crosses have seen a similar price pattern, though AUD-JPY managed to edge out a two-session peak at 75.92. Confirmation that U.S. and China will resume trade negotiations next week gave the Aussie a brief bid. Cable also remained within its Wednesday range, as did EUR-GBP, though the cross looks poised to test last week's six-year high at 0.8992. The U.S. holiday today will make for subdued market conditions today. Stock markets have returned to form, with both the S&P 500 and DJIA posting fresh record highs (aided by strong share buybacks). This comes with the Fed widely expected to lower rates on July 31, with the only question being whether it's a 25 bp or a 50 bp move. President Trump's Fed nominees are also viewed as supportive of his rate cut hopes. Concurrently, the EU's choice of Christine Lagarde to lead the ECB has markets pricing in further stimulus on top of the already accommodative posture, which should curtail EUR-USD's upside potential.

    [EUR, USD]
    EUR-USD dipped back to the 1.1280 area after earlier pressing to a 1.1295 high, leaving yesterday's peak at 1.1311 unchallenged. The U.S. holiday today will make for subdued market conditions today. EUR-USD looks set for a period of limited directional impulse. The Fed is widely expected to lower rates on July 31, with the only question being whether it's a 25 bp or a 50 bp move. President Trump's Fed nominees are also viewed as supportive of his rate cut hopes. Concurrently, the EU's choice of Christine Lagarde to lead the ECB has markets pricing in further stimulus on top of the already accommodative posture, which should curtail EUR-USD's upside potential.

    [USD, JPY]
    USD-JPY remained within the range seen yesterday, still buoyant but bereft of impetus for a challenge of yesterday's high at 107.88. Most Yen crosses have seen a similar price pattern, though AUD-JPY managed to edge out a two-session peak at 75.92. Confirmation that the U.S. and China will resume trade negotiations next week gave the Aussie a brief bid. USD-JPY looks to have entrenched itself in a rough 106.50-108.50 range. Resistance comes in at 108.04-07.

    [GBP, USD]
    The Pound has remained heavy, although the miss in the UK's June services PMI report yesterday didn't produce fresh lows, having been well anticipated by market participants following the big misses in already-released construction and manufacturing PMI surveys. Cable dipped to 1.2558 low in the wake of the release before recouping some, leaving the earlier two-week low at 1.2557 unchallenged. EUR-GBP printed a four-session high at 0.8990, nearing last week's six-month high at 0.8992. The June UK services PMI disappointed at 50.2, a three-month low and dropping from May's 51.0 reading. The June composite PMI worked out at 49.2, dropping sharply from May's 50.7, dragged lower by weak construction and manufacturing components. This is the first time since July 2016 that the composite PMI has been below the 50.0 mark. Overall, the June PMI data paint a picture of an economy in stagnation and at risk of tipping into recession; a consequence of both Brexit-related uncertainty and slowing economic activity in continental Europe. 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). 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. 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 printed a fresh eight-month low at 1.3055 yesterday. News of President Trump's Fed nominees provided a cue for markets to sell the U.S. currency, as the candidates are likely to be sympathetic to the president's proclivity for looser monetary policy. This offset any bullish impact of this week's 6%-plus slide in oil prices on USD-CAD.The pair has now posted lower lows for five consecutive weeks, a feat that was last achieved in June-July 2017. Given indications portending downside risk to Friday's U.S. jobs report, there may be more to come in this bear phase. Resistance comes in at 1.3128-30.

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