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By XE Market Analysis July 16, 2019 4:43 am
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    XE Market Analysis: Europe - Jul 16, 2019

    The main Dollar pairings have been trading in narrow ranges, of less than 15 pips for the most part, and less than 25 pips in the case of USD-JPY. AUD-USD drifted modestly lower following the release of the RBA minutes from the early July policy meeting, which affirmed the Board's dovish bias. The pair posted a 0.7032 low, down from a 13-day high at 0.7044 that was seen during the early part of the Sydney session today (which extended Aussie gains seen after yesterday's forecast beating production and retail sales data out of China). USD-CAD eked out a three-session high at 1.3059 before steadying at slightly low levels. EUR-USD traded in a narrow range centred on 1.1260, holding just above yesterday's low at 1.1253. Cable eked out a four-day low at 1.2507, which extended yesterday's low by 3 pips. USD-JPY posted a high at 108.09, which is 2 pips shy of the high seen yesterday. In equity markets, most of the main Asian indexes have posted moderate gains, though Chinese shares have come under pressure in late PM trading. U.S. Treasury Secretary Mnuchin made positive remarks about progress in trade talks, while markets are bracing for an incoming tide of Q2 corporate earnings results and a hefty slate of U.S. data releases this week, which will collectively paint an updated picture of the impact that trade protectionism has been having. As for Fed easing expectations, Fed funds futures have fully priced in a 25 bp rate cut for July 31, and then some, with the August implied trading at 2.08%.

    [EUR, USD]
    EUR-USD has been trading in a narrow range centred on 1.1260, holding just above yesterday's low at 1.1253. Markets are bracing for an incoming tide of Q2 corporate earnings results and a hefty slate of U.S. data releases this week, which will collectively paint an updated picture of the impact that trade protectionism has been having. As for Fed easing expectations, Fed funds futures have fully priced in a 25 bp rate cut for July 31, and then some, with the August implied trading at 2.08%. As for the Euro side of the equation, there remain reasons to be not too bullish, including the economic-slowing impact of Brexit-related uncertainty, which has been affecting activity on both sides of the channel. Upcoming ECB meetings, starting with the one next week, have shift to a "live" status, with the central bank considering a gear-shift to a strong easing bias. Overall, we retain a neutral-to-bearish view of EUR-USD. Recent U.S. data have on net been near-or-above forecasts, and included warmer than forecast June inflation figures, which should ensure the Fed refrains from anything more than a 25 bp cut at its late-July FOMC meeting. EUR-USD has support at 1.1238.

    [USD, JPY]
    USD-JPY posted a high at 108.09, which is 2 pips shy of the high seen yesterday. In equity markets, most of the main Asian indexes have posted moderate gains, though Chinese shares have come under pressure in late PM trading. U.S. Treasury Secretary Mnuchin made positive remarks about progress in trade talks, while markets are bracing for an incoming tide of Q2 corporate earnings results and a hefty slate of U.S. data releases this week, which will collectively paint an updated picture of the impact that trade protectionism has been having. USD-JPY has been in a bear trend for some 12 weeks now, declining in the latest week after rising over the prior two weeks. Resistance comes in at 108.45-48. Japan's calendar this week brings the June trade report (Thursday), where a JPY 300.0 bln surplus is expected. The June national CPI (Friday) is forecast to cool to 0.6% y/y from 0.7% overall, and to 0.6% y/y from 0.8% on a core basis. The May all-industry index (Friday) is penciled in at 0.2% m/m from 0.9%.

    [GBP, USD]
    Sterling has returned to its underperforming ways again, declining, albeit moderate, against the Dollar and Euro over the last day, among other currencies. Cable has printed a five-session low at 1.2467, swinging the 27-month low seen last week at 1.2439 back into view. EUR-GBP has concurrently lifted to a fresh six-month high at 0.9021. We remain neutral-to-bearish on the Pound 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. The UK will have a new prime minister next week, with the Conservative Party's leadership party concluding next Tuesday. Boris Johnson is almost certain to become the new UK boss. He has been emphasizing that he is fully intent on the UK leaving the EU without a deal as his base position, hoping that this will see Brussels waiver on its red lines while maintaining that the no-deal option will be taken if necessary. This backdrop is keeping a lid on the pound, which we estimate to have been trading at a 10-15% discount since the vote to leave the EU in June 2016.

    [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 edged out a four-session high at 1.3064, putting in a little distance from the nine-month low seen on Friday at 1.3022. We still judge the pair to be amid a distinct bear trend that's been unfolding since late May, having declined in five of the last six weeks. Trend resistance comes in at 1.3071-73. The Fed's course to policy easing has been driving the downward bias. As for the BoC, the central bank maintained a neutral bias last week as it delivered the widely expected no change in the 1.75% rate setting. Officials did however emphasize that the trade and geopolitical backdrops are clouding the outlook. Policy remains data driven for the BoC, which will "pay particular attention to developments in the energy sector and the impact of trade conflicts on the prospects for Canadian growth and inflation." Canada's data docket this week will provide the latest update on inflation, with June CPI due today. We expect CPI to pull-back 0.4% in June (m/m, nsa) after the 0.4% gain in May, as gasoline prices were sharply lower during the month. CPI on an annual comparable basis (y/y) is projected to slow to a 1.8% growth rate from the 2.4% clip in May. The BoC expects CPI to slow in Q3 as the temporary factors boosting CPI in Q2 unwind.

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