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By XE Market Analysis July 12, 2019 4:08 am
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    XE Market Analysis: Europe - Jul 12, 2019

    The USD traded softer heading into the London interbank open, retracing from of the gains seen yesterday following a near 10 bp spike in the 10-year U.S. T-note yield, which touched a one-month high at 2.143%. This came as the S&P 500 and DJIA hit record highs. The narrow trade-weighted USD index (DXY) ebbed to a 96.89 low earlier, though has remained above yesterday's one-week low at 96.80, which was seen ahead of the perkier than expected core CPI and jobless claims data out of the U.S. EUR-USD mirrored this price action in rising to an intraday high at 1.1275 and remaining shy of yesterday's eight-day high at 1.1285. USD-JPY settled to around 108.30-35 after printing a high at 108.61. From here, we would expect the USD to pick up some demand on dips. While the Congressional testimonies of Fed Chair Powell this week signalled a 25 bp rate cut at the FOMC later this month, leaving the door open to a more aggressive policy action, a couple of other Fed speakers yesterday were a little less sanguine over the need for more stimulus. One thing to note is rising speculation in markets that the Trump administration might intervene in currency markets and weaken the USD as a means to leverage up its negotiating position in trade talks with China and other major economies. Another focus is the upcoming Q2 corporate earnings season, which will get into gear next week with "show and tells" from the banking sector. Trade warring and slowing global growth have set the scene for a possible earnings recession, which could catalyze a risk-off phase in global markets.

    [EUR, USD]
    EUR-USD rose to an intraday high at 1.1275 but remained shy of yesterday's eight-day high at 1.1285, and subsequently turned lower at the European open. We anticipate that the USD will find demand on dips given the 10 bp spike in the 10-year U.S. T-note yield yesterday, which came as as the S&P 500 and DJIA hit record highs and followed above-forecast core CPI and jobless claims data out of the U.S. While the Congressional testimonies of Fed Chair Powell this week signalled a 25 bp rate cut at the FOMC later this month, leaving the door open to a more aggressive policy action, a couple of other Fed speakers yesterday were a little less sanguine over the need for more stimulus. As for the ECB, the central bank has been heading back to the stimulus spigot, but we don't expect it to pre-empt the Fed, which could curtail EUR-USD's downside potential. Support comes in at 1.1148-50. The pair has been trading broadly neutrally in directional terms since late April, notwithstanding the 26-month low that was edged out in mid May, which follows what was about a 14-month down trending phase.

    [USD, JPY]
    USD-JPY settled to around 108.30-35 after printing a high at 108.61. The high extended the recovery from the one-week low seen yesterday at 107.86. The pair has been in a bear trend for some 12 weeks now, although rebounding over the last two weeks. A close above 108.46-48 today would be needed to make it three straight weeks of gains. Resistance comes in at 108.45-48.

    [GBP, USD]
    Cable posted a one-week peak at 1.2571 yesterday, which extended the rebound from the 27-month low seen earlier in the week at 1.2439. We wouldn't advise trend following GBP gains given the evident impact that prolonged Brexit uncertainty and increased risk of a on-deal exit from the EU have been wielding on the UK economy. GBP-USD has support at 1.2510-12.

    [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 is down for a third consecutive day, this time printing a nine-month low at 1.3022, extending losses from the two-week high seen on Wednesday at 1.3144. The pair has been in a distinct bear trend since late May, declining in four of the last five weeks. A close tomorrow at or below 1.3084 today would rack up another weekly decline. Trend resistance comes in at 1.3071-73.

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