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By XE Market Analysis July 16, 2013 2:59 am
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    XE Market Analysis: Europe - Jul 16, 2013

    Dollar consolidation continued ahead of Fed Chairman Bernanke's testimony on Wednesday. The highlight in Asia was the RBA minutes from the early July meeting. RBA maintained that the current inflation rate still provided some scope for further easing if needed. However it noted that the recent AUD drop added a bit to inflation, but it still expected it to remain within the target range. It reiterated that AUD was still high and could fall further. Over the 'minutes' AUD rallied from 0.9100 and ended the session at intra-day highs over 0.9180. A front page editorial in the China Securities Journal said China could tolerate slower growth in order to get a structural adjustment, adding that current levels of growth are still significantly above the growth floor. In Europe, German ZEW investor confidence is expected to rise, while there are CPI releases from the Eurozone and the U.K. Spain and Greece also have bill sales.

    [EUR, USD]
    EUR-USD traded in a tight range, but the balance of risk remained on the topside after yesterday's rebound out of the 1.2990-00 region. It started the session around 1.3065 and moved up through 1.3080 late on in the Asian session. In the absence of stronger leads intra-day accounts looked to AUD and JPY for their guidance. USD-JPY was weighed by corporate flows and AUD-USD pushed higher, which provided positive impetus for the EUR, particularly as European traders entered the market. The EUR-USD upside may attract further into Bernanke's testimony, as risk is taken off the table ahead of potential volatility. A reduction in dollar longs could lift the EUR back through 1.3100 to revisit 1.3150.

    [USD, JPY]
    USD-JPY met selling pressure on upticks following yesterday's pullback from the 100.50 region. Corporate hedging weighed after an early move out of 99.70 to just over 100.00. USD-JPY headed to 99.65, but further losses were absorbed by good short term bids amid a positive underlying tone in light of yesterday's rally out of the 99.25 region. The technical backdrop is very positive in the short-term, but repositioning and event risk will be more pivotal in the first half of the week. Short term dollar buyers may find that exporters could use any dollar upturn to execute hedging needs ahead of Bernanke's testimony on Wednesday, where volatility could be high again. On the topside, heavy resistance is noted from 100.50 to 101.00 in the short term.

    [GBP, USD]
    Cable was stuck at 1.5100 overnight, with more option expiries at 1.5100 and 1.5125 a potential influence today. The Cable move out of 1.5040 back over 1.5100 on Monday came on dollar selling amid a disappointing U.S. retail sales reading. Ranges may remain tight into Wednesday, where both the BoE minutes and Bernanke's testimony are due. The 'minutes' will be the first for BoE Governor Carney and will give an insight into his thinking after he introduced forward policy guidance.

    [USD, CHF]
    EUR-CHF edged back into 1.2400. After hitting lows of 1.2348 late Friday it has been on the rise as risk appetite has remained stable. China Q2 GDP provided positive impetus for stocks, along with upbeat earnings reports from large U.S. banks, which weighed on the CHF. USD-CHF was unable to sustain higher levels though as the dollar came under pressure on retail sales and light repositioning. The dollar is more likely to drive action in the coming sessions given the testimony from Bernanke on Wednesday. Ahead of then, background Eurozone risk could limit the scope for extended EUR-CHF upside. The cross has quite a strong correlation with Eurozone bond spread yields and since they widened, hot money flows have moved back into the CHF.

    [USD, CAD]
    USD-CAD is still supportive ahead of the 1.0400 region after it caught a recent bid in London on Monday. Short term players prefer being long of USD-CAD into the BoC policy announcement on Wednesday. There is a risk that new BoC Governor Poloz could move from a tightening bias to a more neutral stance due to the evolution of economic data. Weak manufacturing shipments today could lift USD-CAD through resistance around the 1.0450 area and would set the pair of for extended gains later this week, with an eye on 1.0500 if the BoC adjusts its stance. The caveat, of course being, that the market is beginning to get long and if BoC maintains policy status quo then a correction back towards 1.0300 is on.

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