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By XE Market Analysis July 9, 2019 3:34 am
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    XE Market Analysis: Europe - Jul 09, 2019

    Moderate USD firming has been a prevalent theme, driving the narrow USD index (DXY) to a two-session high at 97.43, which is just 1 pip shy of the near three-week peak that was seen on Friday. Markets are looking to Fed Chair Powell's Monetary Policy Report on Wednesday in the wake of Friday's strong jobs report. A much anticipated 50 bp easing at the July 30-31 FOMC was knocked out by the 224k climb in nonfarm payrolls, which has fed a rotation higher in the USD, although a 25 bp "insurance" cut is still expected to be signalled by Powell. EUR-USD edged out a three-week low at 1.1206, surpassing Friday's low by 1 pip according to our data. Cable came within 6 pips of the six-month low seen Friday at 1.2481, while AUD-USD printed a two-week low at 0.6951 and USD-CAD logged a two-session high at 1.3110. USD-JPY, meanwhile, rallied to a five-week high at 108.89. Asia stock markets have pared intraday losses for the most part, and Japan's Nikkei managed to close with a fractional 0.14% gain.

    [EUR, USD]
    EUR-USD edged out a three-week low at 1.1206, surpassing Friday's low by 1 pip according to our data. The tempering in Fed easing expectations following Friday's strong jobs data remains an active dynamic, although one that should fade into Fed Chairman Powell's Congressional testimony on Wednesday and Thursday. Aside from the flow and then ebb in Fed rate cut expectations, in the Euro's case market narratives have been centering on weak data and the dovish credentials of ECB boss designate, Lagarde, which last week tipped Bund yield curve into negative right out to the 20-year maturity while the 10-year yield flirted with -0.400%. EUR-USD has support at 1.1205-07, and resistance at 1.1285-88.

    [USD, JPY]
    USD-JPY rallied to a five-week high at 108.89, driven by a broader USD bid. Asia stock markets pared intraday losses today for the most part, and Japan's Nikkei managed to close with a fractional 0.14% gain. While USD-JPY declined in eight of the last 12 weeks, the last two have been up weeks and this week looks, so far, to made it a third. Support comes in at 108.45-48.

    [GBP, USD]
    Cable came within 6 pips of the six-month low seen Friday at 1.2481. EUR-GBP concurrently made a two-session high, at 0.8980, looking set on a challenge of Friday's six-month high at 0.6992. 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 1.2550-55. Last week's June composite PMI fall sharply to 49.2 from May's 50.7, signalling economic contraction and highlighting the impact of prolonged Brexit uncertainty and slowing growth momentum in continental Europe. As for Brexit, the news flow has remained 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 will be later in the month). The UK data calendar this week is highlighted by BRC June retail sales (Tuesday) and industrial production (Wednesday). We expect the former to rebound 0.8% after a weak May (which had been due to a combination of chilly weather and the late timing of Easter this year). We anticipate industrial production to see some rebound-from-weakness, with output seen rising by 1.5% m/m after the 2.7% contraction in April.

    [USD, CHF]
    EUR-CHF has put in a couple of weeks of steady, range-bound trading after dropping sharply in mid June as markets adjusted to increased prospects for the ECB to return to the dovish policy tap. The cross printed a two-year low at 1.1057 before recouping to levels around 1.1100. The advance of the Franc against the Euro will 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 last 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 gained for a second day, this time posting a two-session high at 1.3119. This recovers most of the gains seen in the immediate wake of Friday's release of the U.S. and Canadian jobs reports for June. The pair has been in a distinct bear trend since late May, and has declined in four of the last five weeks. Trend resistance comes in at 1.3091-94.

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