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By XE Market Analysis July 15, 2013 3:17 am
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    XE Market Analysis: Europe - Jul 15, 2013

    The risk backdrop was supported overnight as China Q2 GDP came in at 7.5% y/y, which was in line with expectations. However, after weak export data last week and negative comments from Finance Minister Lou the market was bracing for a weak reading. There was relief in Asia, though the China benchmark index was much stronger than its peers, which only managed modest gains. As the European session got underway the dollar ticked higher. There is still a lot of Eurozone uncertainty to manage and this could work against the EUR topside. The Fitch downgrade of France after Friday's European close had limited impact. Portugal political uncertainty is still in the spotlight, but all three main parties have agreed to talk and set a July-21 deadline to agree a national salvation pact that will keep it on track to meet the terms of the EUR 78 bln rescue. In Spain, PM Rajoy got more bad press on the weekend surrounding the slush fund scandal, which could weigh on markets there and in-turn the EUR.

    [EUR, USD]
    EUR-USD moved higher in early trade and threated offers ahead of 131.00. EUR-JPY demand added a bit of momentum to the firmer levels. However, after hitting 1.3085 it ran out of steam and eased into 1.3055. China GDP data encouraged buying interest, but it did not trade much higher than the 1.3075 level, where it remained into the European open. EUR has been in a holding pattern since last week. However, after surging from 1.2755 to 1.3207 it has stabilised ahead of 1.3000, leaving bias slightly more favourable for higher levels. There was a muted reaction to Fitch's French downgrade to AA+ from AAA. The political situation in Portugal looks more hopeful after political parties started to talk over the weekend to resolve the problems there, but in Spain, PM Rajoy got caught up in the slush fund scandal again, which could weigh on European markets.

    [USD, JPY]
    USD-JPY maintained a stable tone throughout. Short term accounts made an early push on higher levels. However, offers from 99.50 held and the pair headed lower from the 99.40 region to test 99.00. However, after reaching 99.05 it steadied around 99.25 and held around these levels for a large part of the session. Even after the China data releases there was no appetite to force USD-JPY in either direction, suggesting more limited action ahead. On an intra-day basis USD-JPY may trade between good orders at 99.00 to 98.70-80 and offers from 99.50 and above in light of the Japanese public holiday.

    [GBP, USD]
    Cable moved back across 1.5100 by early Europe as offers capped from 1.5130 in Asia. Despite the pick up in Asia stocks there was no interest to sell the dollar aggressively and prices drifted into the European open. Large expiries at 1.5100 could influence for the second consecutive session. There was more positive data from the U.K. overnight as the Rightmove house price index pointed to more strength. Think tank ITEM Club said that the U.K. economy would do better than previously forecast and this may help the government's borrowing figures.

    [USD, CHF]
    EUR-CHF often comes under pressure when Eurozone risks rise, which was the case on Friday and it maintained the heavier tone today. The cross is trading close to the 1.2370 area after it headed into 1.2350 on Friday. Fitch downgraded France on Friday to play catch up with S&P and Moody's. Meanwhile, Spanish PM Rajoy was back in the spotlight after more embarrassing messages surrounding the slush fund scandal hit the weekend press. Portugal are working towards an agreement as the three main parties set a July-21 deadline to agree to a national salvation pact to keep its EUR 78 bln rescue on track. Eurozone risks should see EUR-CHF run into selling pressure on upticks and 1.2400 should provide interim resistance in the near-term.

    [USD, CAD]
    USD-CAD moved across 1.0400 into the European session as the dollar edged higher. For USD-CAD traders the Bank of Canada announcement on Wednesday and MPR are in focus, which is the first for Stephen Poloz as the new governor of the Bank. Assessment of the Alberta flooding could leave a slight dovish tilt, supportive of recent outperformance by Canadian bonds versus Treasuries and negative for the Canadian dollar. USD-CAD could clear offers ahead of 1.0450 ahead of the decision and if there is a dovish tilt from Poloz then offers from 1.0470 to 1.0500 could give way to revive the underlying bull trend.

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