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By XE Market Analysis July 20, 2018 2:54 am
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    XE Market Analysis: Europe - Jul 20, 2018

    The Dollar has been trading with a softer bias after President Trump said yesterday that he was "not thrilled" with higher interest rates while venting at the weaker Yuan, even though the remarks that were subsequently walked back some by a White House official. Trump's remarks were from a preview of an interview with CNBC, which will be played in its entirety later today. EUR-USD posted a 1.1678 high in the wake of Trump's remarks and has subsequently met good demand on dips. USD-JPY has consolidated below 112.50, above the Trump-inspired low at 112.05. There has also been a rekindling in the Yen's safe haven premium, reflected by declines in EUR-JPY, AUD-JPY and other Yen crosses. AUD-JPY printed a nine-day low of 82.21, for instance. Stock markets have been mixed in Asia, and S&P 500 futures have modestly extended yesterday's regular-session decline. The PBoC devalued the Yuan by the most for a single day since June 2016, with USD-CNY's reference rate set at 6.7671, up from yesterday's 6.7066 and the highest in a year. This points to a deepening in the Sino-U.S. trade war. In data, Japan's June core CPI lifted to a rate of 0.8% y/y, up from 0.7% y/y in May, as expected and still far short of the central bank's 2% target. The data chimes with a recent report saying that the BoJ will likely cut its long-term inflation projections.

    [EUR, USD]
    EUR-USD posted a 1.1678 high in the wake of Trump's remarks and has subsequently met good demand on dips. The buoyancy in the pairing has reflected Dollar weakness after President Trump said yesterday that he was "not thrilled" with higher interest rates. Trump's remarks were from a preview of an interview with CNBC, which will be played in its entirety later today. The President's verbal intervention in forex has thrown a spanner in the works of our bearish EUR-USD view, which was rooted on the prognosis for strong U.S. economic growth and the Fed's tightening course. EUR-USD has support at 1.1626-30.

    [USD, JPY]
    USD-JPY has consolidated losses seen after President Trump said yesterday that he was "not thrilled" with higher interest rates, remarks that were subsequently walked back some by a White House official. There has also been a rekindling in the Yen's safe haven premium, reflected by declines in EUR-JPY, AUD-JPY and other Yen crosses. AUD-JPY printed a nine-day low of 82.21, for instance. Stock markets have been mixed in Asia, and S&P 500 futures have modestly extended yesterday's regular-session decline. The PBoC devalued the Yuan by the most for a single day since June 2016, with USD-CNY's reference rate set at 6.7671, up from yesterday's 6.7066 and the highest in a year. This points to a deepening in the Sino-U.S. trade war. In data, Japan's June core CPI lifted to a rate of 0.8% y/y, up from 0.7% y/y in May, as expected and still far short of the central bank's 2% target. The data chimes with a recent report saying that the BoJ will likely cut its long-term inflation projections (according to unnamed sources cited by Reuters). The central bank meets on policy on July 30-31, when a quarterly revision of inflation and growth forecasts will also be published. While fundamentals for USD-JPY are bullish (on the contrasting courses of Fed and BoJ policy), the pair may trade lower should a risk-off sentiment take hold. USD-JPY has resistance at 113.38-40.

    [GBP, USD]
    Sterling has underperformed this week. Wednesday's unexpected dip in core UK CPI (to 1.9% y/y from 2.1% y/y) along with yesterday's unexpected contraction in June retail sales (of 0.5% m/m) have been ostensibly blamed for dimming BoE tightening expectations, though there are arguments that hawks at the MPC could use to downplay both -- summer discounting being behind an aberrative ebb in inflation, and, in the case of retail sales, hot weather and the national fixation on the World Cup being behind one-off declines in footfall on the high street and online activity. A more pressing concern is the sharpening Brexit negotiation process, as time starts to run out, with an EU source cited by Bloomberg saying that the UK government's policy document, which lays out what it wants from a new relationship with the EU, is unclear. EU ministers will meet in Brussels today to formally review the UK government's proposals. The European Commission said today that "everyone must now step up plans for all scenarios" ahead of March 29th next year, especially in the event of a no-deal exit. We continue to see directional risks to Cable as being greater to the downside than to the upside. Cable has resistance at 1.3042-45.

    [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 settled higher, around 1.3250. 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 this week. 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. The Canadian calendar picks up today with the release of retail sales and CPI data. We expect retail sales to snap back by 1.0% in May after the 1.2% loss in April that was blamed on poor weather during the month (ice storm!). We anticipated CPI to slip 0.1% in June (m/m, nsa) after the surprisingly slim 0.1% gain in May, as falling gasoline prices impact in June. The annual growth rate is seen at 2.2% (y/y, nsa), matching the 2.2% y/y clip in May. The three core CPI measures are expected to maintain 1.9% annual rate of expansion in June.

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