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By XE Market Analysis July 17, 2019 4:15 am
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    XE Market Analysis: Europe - Jul 17, 2019

    The Dollar has settled to a consolidation at modestly lower levels after rallying yesterday. The narrow trade-weighted USD index (DXY) has steadied around 97.35, down from the one-week high seen yesterday at 97.55, though remaining higher by a net 0.6% on the week so far. EUR-USD has settled in the lower 1.1200s, above the eight-day low seen yesterday at 1.1202, and USD-JPY has remained off yesterday's three-day peak at 108.37. Slightly better than expected retail sales and production reports out of the U.S. yesterday encouraged markets to take a more circumspect view of Fed easing prospects, though both Fed Chair Powell and Chicago Fed's Evans maintained a dovish tone in remarks, keeping markets prepped for a 25 bp easing on July 31. The Australian Dollar came under particular pressure, which drove AUD-USD and AUD-JPY to respective three-day lows at 0.7002 and 75.72. A sharp, 3%-plus drop in iron ore futures (traded on the DCE exchange in China), was reportedly a factor weighing on the Aussie, while President Trump's threatening to put another $325 bln of tariffs on Chinese goods was also in the mix (with the antipodean currency widely viewed as a liquid forex market proxy on China). Elsewhere, the Pound has remained heavy after posting new major-trend lows against the Dollar and Euro, among other currencies, yesterday, with markets factoring in increased odds for a no-deal Brexit, with Boris Johnson looking set to become the new UK prime minister next Tuesday.

    [EUR, USD]
    EUR-USD has settled in the lower 1.1200s, above the eight-day low seen yesterday at 1.1202, which was a product of Dollar strength following above-forecast industrial production and retail sales data out of the U.S. The data took the edge off more Fed easing expectations, though a 25 bp cut on July 31 is still being fully discounted by Fed fund futures. 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 an explicit 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 1.1200-02 and resistance at 1.1238-41.

    [USD, JPY]
    USD-JPY has remained off yesterday's three-day peak at 108.37. Slightly better than expected retail sales and production reports out of the U.S. yesterday encouraged markets to take a more circumspect view of Fed easing prospects, though both Fed Chair Powell and Chicago Fed's Evans maintained a dovish tone in remarks, keeping markets prepped for a 25 bp easing on July 31. 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]
    The Pound has remained heavy after posting new major-trend lows against the Dollar and Euro, among other currencies, yesterday, with markets factoring in increased odds for a no-deal Brexit, with Boris Johnson looking set to become the new UK prime minister next Tuesday. Cable hit a 27-month low at 1.2386, and EUR-GBP a six-month high at 0.9051. This is now the 10th week out of the last eleven that Her Majesty's currency has seen a new lower low against the Euro, while this is the fifth week out of the last six that the Pound has seen a lower low in the case against the Dollar. This comes with the deleterious economic effects of prolonged Brexit-related uncertainty having become increasingly palpable, with the UK economy now in a state of stagnation.

    [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 printed a five-session high at 1.3093 yesterday, putting in a little distance from the nine-month low seen on Friday at 1.3022. A sharp drop in oil prices yesterday on signs of easing tensions between the U.S. and Iran added some pressure on the Canadian Dollar, while the U.S. buck has been in demand. We still judge USD-CAD 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."

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