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By XE Market Analysis July 18, 2018 2:51 am
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    XE Market Analysis: Europe - Jul 18, 2018

    The Dollar has traded firmer for a second day, buoyed by an upbeat prognosis of the U.S. economy and outlook by Fed chair Powell yesterday at his semi-annual testimony before the Senate Banking Committee. EUR-USD descended to a three-day low at 1.1631 while USD-JPY ascended above 113.00 for the first time since January. AUD-USD printed a one-week low at 0.7363 and USD-CAD a three-week high at 1.3227. Powell's remarks seemed to hit a sweet spot, having expressed optimism on the growth outlook while being somewhat circumscribed on inflation, which leaves the Fed on course for another 25 bp hike in September, and another in December, but not to the displeasure of equity investors, who have also been encouraged by positive Q2 corporate earnings announcements, and expectations for more to come. In the UK, the prime minister once again survived a key vote on a Brexit-related bill by the skin of her teeth last night (although lost one concerning the regulation of medicines after Brexit). So the PM and her government survives, but Brexit process is looking borderline disorderly.

    [EUR, USD]
    EUR-USD descended to a three-day low at 1.1631 in the wake of upbeat remarks on the economy from Fed chair Powell yesterday. We are bearish of EUR-USD, based on strong U.S. economic growth and the Fed's tightening course, while any move from Trump to follow-through on hits threats to tariff car imports -- which he looks to be gearing up for, describing the EU as a "foe" last weekend -- would presumably be negative for the Euro relative to the Dollar. Former EUR-USD support at 1.1695-1.1700 now reverts as resistance

    [USD, JPY]
    USD-JPY ascended above 113.00 for the first time since January. The move was mostly driven by broader Dollar strength, which has been seen in the wake of Fed chair Powell giving an upbeat prognosis of the U.S. economy and outlook yesterday. This provided a fresh reminder of USD-JPY's underlying bullish fundamentals, which is rooted in contrasting policy outlooks for the Fed and BoJ. A report from last Friday that the BoJ will likely cut its long-term inflation projections, according to unnamed sources cited by Reuters, has continued to resonate. The sources suggested that the BoJ will concede that CPI will likely remain below the 2% target for as long as three more years, highlighting structural factors that are capping inflationary price pressures. The BoJ meets on policy on July 30-31, when a quarterly revision of inflation and growth forecasts will also be published. Buoyant global stock markets, where overall upbeat Q2 corporate earnings, and expectations for more, have offset concerns about trade protectionism for now, which has seen the Yen's safe haven premium unwind some. USD-JPY has resistance at 113.38-40.

    [GBP, USD]
    The Pound has come under pressure. Cable posted a three-week low at 1.3068 while EUR-GBP printed four-month highs above 0.8900. The British prime minister once again survived a key vote on a Brexit-related bill by the skin of her teeth last night (although lost one concerning the regulation of medicines after Brexit), but Brexit process is looking borderline disorderly. BoE Governor Carney yesterday warned of "big economic consequences" to the economy in the event of a no-deal exit from the EU, though he stressed that it would be "premature" for the central bank to make judgements on the government's recently publish policy document on Brexit, and he also emphasized that the UK banking sector was appropriately capitalised for a cliff-edge Brexit scenario. Regarding the BoE, our call is for a 25 bp hike in the repo rate to be announced on August 2, which would take the rate to 0.75%. However, this has become a tentative call given the sharpening in Brexit-related tensions in UK politics. The OIS market has been pricing in about 70% probability for a 25 bp in the repo rate in August.

    [USD, CHF]
    EUR-CHF has settled back in the mid 1.1600s, down from the eight-week high seen earlier in the week at 1.1714. SNB's Maechler said late last month that the Franc "remains highly valued" despite the depreciation seen over the last year, arguing that "we are in extraordinary times and we are using unconventional measures." The commáents affirm that the SNB is firmly on hold, with Maechler admitting that the SNB's monetary policy room for manoeuvre is "necessarily" affected by the actions of ECB and Fed.

    [USD, CAD]
    USD-CAD has gained for a second day, posting a three-week high at 1.3242, which is a little north of the midway point of the range that's been seen over the last month. Fed chair Powell yesterday gave an upbeat view of the U.S. economy, which join the recent heavy declines in oil prices in forming a cocktail of bullish narratives for USD-CAD. We look for a revisit of the June highs at 1.3384-87. The pair has support at 1.3146-68.

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