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By XE Market Analysis July 17, 2017 3:26 am
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    XE Market Analysis: Europe - Jul 17, 2017

    The dollar and other currencies consolidated. Trading has been thin with Japanese markets closed, and with northern hemisphere markets in summertime mode. USD-JPY, after posting its first down week since early June last week, settled in the mid 112.0s. EUR-USD edged out a three-session high at 1.1474 before ebbing to around 1.1450 in a market lacking directional ambition. While the pair logged 13-month highs last week, which was the culmination of a three-month rally phase, some momentum indicators are flagging, with the 14-day relative strength index, for instance, falling back despite the new highs. This is what the technically minded call bearish divergence, which can be a precursor of a trend shift. Elsewhere, the Australian dollar settled lower after rallying strongly last week on the back of data showing strong Chinese trade figures (particularly of iron ore imports, Australia's biggest export) and the slow-go rate hike guidance from the Fed. AUD-USD ebbed to the low 0.78s, below Friday's 15-month peak at 0.7834.

    [EUR, USD]
    EUR-USD edged out a three-session high at 1.1474 before ebbing to around 1.1450 in a market lacking directional ambition. While the pair logged 13-month highs last week, which was the culmination of a three-month rally phase, some momentum indicators are flagging, with the 14-day relative strength index, for instance, falling back despite the new highs. This is what the technically minded call bearish divergence, which can be a precursor of a trend shift.

    [USD, JPY]
    USD-JPY, after posting its first down week since early June last week, settled in the mid 112.0s. AUD-JPY, which rallied strongly last week to 19-month highs, is also trading softer, as is EUR-JPY. We have been advocating a bullish view of USD-JPY, based on the Fed's gradualist tightening path, which has been giving the dollar a yield advantage while maintaining a risk-on backdrop in global equity markets.

    [GBP, USD]
    Sterling has settled to a consolidation after rallying last week. After a period of underperformance, the pound found respite amid secular weakening in the dollar and euro over the last week, though BoE policymaker remarks and UK data were mixed. BoE MPC member McCafferty, a long-term hawk, argued that the central bank needs to consider QE tapering, while his colleague Broadbent said he was not ready to hike rates, and talked at length during a speech about the risks that a "bad" Brexit would have on UK costs and income. This week's UK schedule brings the June inflation report (Tuesday), where we expect headline CPI to remain at 2.9% y/y (median same), a four-year high. The sharp y/y weakening in sterling following the Brexit vote in June last year has kindled inflation, and at least three of the current eight member MPC committee (normally nine, with one position currently vacant) now itching to reverse last August's 25 bp cut in the repo rate. Official retail sales for June (Thursday) has us expecting a 0.2% m/m rebound after the sharp 1.2% contracting on May (median 0.3%). Despite signs of a hawkish awakening at the BoE, we remain bearish of sterling, wary of PM May's much weakened government to successfully navigate the tricky and unseen waters of Brexit.

    [USD, CHF]
    EUR-CHF has settled in the mid 1.10s after logging a 10-month high at 1.1073 last week. The cross remains about 1.5% up on levels prevailing in late June, having gained amid a broader bid in the euro following a batch of signals from ECB policymakers that have collectively affirmed that policy tapering is on the table. The policy shift will be welcome by Swiss policymakers after Switzerland's inflation dipped to just 0.2% y/y in June data, down from 0.5% in May and threatening a return of deflation. The price data would have rekindled the SNB's desire for a weaker franc, having stressed at its June policy review that the currency remains "significantly" overvalued.

    [USD, CAD]
    USD-CAD carved out a new 14-month low at 1.2640 during the thin Asia session. This extends the latest down phase, catalysed by last week's BoC rate hike, while the new low is the culmination of a down phase that's been in play since mid May, over which time the Canadian economy has showed consistent signs of improvement while BoC policymakers have been expressing the view that the drag from the oil-related shock in recent years has now passed. We recommend a trend following strategy for now with weak U.S. inflation data for June having all but kicked Fed tightening possibilities out of 2017 and into 2018. Trend resistance is at 1.2796-98. The May 2015 low at 1.2461 provides a downside reference marker.

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