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By XE Market Analysis July 19, 2018 3:22 am
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    XE Market Analysis: Europe - Jul 19, 2018

    The Dollar has mostly traded in narrow ranges so far today, consolidating at softer levels after coming off highs yesterday. The Australian Dollar rallied on a stronger than expected Australian jobs report, which showed employment rising 50.9k in June from an upwardly revised 13.4k gain in the month prior. AUD-USD rallied to a high of 0.7441, subsequently drifting back to the 0.7410 area. EUR-USD settled in the mid 1.1600s, coming under some pressure into the London interbank open, after yesterday posting a two-week low at 1.1601. USD-JPY made time in the upper 112.00s after yesterday capping out at 113.13, which is the loftiest level the pairing has seen since January. USD-CNY, meanwhile, posted a near one-year low. We retain a generally bullish view of the dollar, rooted on the strong U.S. economy and the Fed's course to further rate hikes.

    [EUR, USD]
    EUR-USD settled in the mid 1.1600s, coming under some pressure into the London interbank open, after yesterday posting a two-week low at 1.1601. We remain bearish of the pairing, based on the prognosis for 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 would likely be negative for the Euro relative to the Dollar. EUR-USD has resistance at 1.1660-62 while the July-2 low at 1.1591 provides a downside waypoint.

    [USD, JPY]
    USD-JPY has been making time in the upper 112.00s after yesterday capping out at 113.13, which is the loftiest level the pairing has seen since January. Buoyant global stock markets, where upbeat Q2 corporate earnings, and expectations for more, have offset concerns about trade protectionism for now, which has allowed the Yen's safe haven premium to unwind some and for markets to focus on bullish fundamentals (i.e. contrasting policy paths of the Fed and BoJ). A report from last Friday that the Japanese central bank 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, and highlight structural factors that are capping inflation. The central bank meets on policy on July 30-31, when a quarterly revision of inflation and growth forecasts will also be published. USD-JPY has resistance at 113.38-40.

    [GBP, USD]
    Sterling has settled off lows after diving yesterday concomitantly with UK yields, which followed softer than expected inflation data. Cable hit a low of 1.3009, the lowest level seen since last September, while EUR-GBP printed a four-month high at 0.8932. UK June CPI unexpectedly held unchanged at 2.4% y/y versus the median forecast for a rise to 2.6% y/y, while core CPI fell to 1.9% y/y from 2.1% y/y in May, contrary to the median expectation for an unchanged reading. The data reduces the odds for the BoE to tighten at the August MPC meeting. One of the supporting arguments behind the BoE's guidance for gradual tightening is that a tight labour market and low productivity growth will conspire to drive wages and consumer prices up, though this clearly hasn't been transpiring yet. This comes with markets fretting about a disorderly Brexit process. BoE Governor Carney on Tuesday warned of "big economic consequences" to the economy in the event of a no-deal exit from the EU, although he stressed that it would be "premature" for the central bank judge things will proceed while emphasizing that the UK banking sector was appropriately capitalised for a over-the-cliff-edge Brexit scenario. Regarding BoE policy, our view is for a 25 bp hike in the repo rate to be announced on August 2, but this has now become a more tentative call, while any such move would likely accompanied with guidance for on hold policy thereafter.

    [USD, CHF]
    EUR-CHF has settled in the lower 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 turned back below 1.3200 after peaking yesterday at 1.3259, which is a three-week peak. Fed chair Powell's upbeat view of the U.S. economy, along with recent hefty declines in oil prices, formed a cocktail of bullish narratives for USD-CAD. We retain a bullish view of the pairing, looking for a revisit of the June highs at 1.3384-87. Support comes in at 1.3146-68.

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