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By XE Market Analysis July 22, 2019 3:51 am
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    XE Market Analysis: Europe - Jul 22, 2019

    The Dollar has remained underpinned amid a scaling back in Fed easing expectations, which look to have settled on a 25 bp cut at the upcoming FOMC rather than a 50 bp move. The narrow trade-weighted USD index (DXY) has risen fractionally, to 97.24, but has so far remained below Friday's peak at 97.29. EUR-USD has made time in a narrow range in the lower 1.1200s, holding above last week's two-week low at 1.1199, while USD-JPY carved out a three-session high at 108.06. Regarding the Fed, last week's wall-back by the New York Fed of dovish remarks by its president, Williams, along with the the suggestion on Friday by uber-dove Bullard that only a 25 bp move is in the pipeline have quelled market speculation for a 50 bp move. This Friday's release of advance Q2 GDP out of the U.S. will be the final key release before the FOMC on July 30-31. We are expecting 1.8% q/q and 3.2% y/y outcomes, which should keep the Fed on for a 25 bp rather than 50 bp move. In news, the ruling coalition of Japan's Prime Minister Abe won a majority in the upper house of Parliament following yesterday's election, which seemed to elicit some Yen selling as it implies a continued bias toward maximum monetary stimulus. Sterling has been trading steadily into the widely expected victory of Boris "no-deal Brexit" Johnson tomorrow at the final stage of the Conservative Party's leadership context.

    [EUR, USD]
    EUR-USD has made time in a narrow range in the lower 1.1200s, holding above last week's two-week low at 1.1199. We retain a bearish view, with the ECB expected to gear-shift to an explicit easing bias at its meeting this Thursday, which would lay the groundwork for an easing in September, while the markets have been scaling back in Fed easing expectations, which look to have settled on a 25 bp cut at the upcoming FOMC rather than a 50 bp move. Last week's wall-back by the New York Fed of dovish remarks by its president, Williams, along with the the suggestion on Friday by uber-dove Bullard that only a 25 bp move is in the pipeline have quelled market speculation for a 50 bp move. This Friday's release of advance Q2 GDP out of the U.S. will be the final key release before the FOMC on July 30-31. We are expecting 1.8% q/q and 3.2% y/y outcomes, which should keep the Fed on for a 25 bp move rather than a 50 bp one.

    [USD, JPY]
    USD-JPY carved out a three-session high at 108.06, driven in part by Dollar buoyancy amid a tempering in Fed easing expectations and in part by yen selling, which was prompted by news of the ruling coalition of Japan's Prime Minister Abe winning a majority in the upper house of Parliament following yesterday's election, which seemed to elicit some yen selling as it implies a continued bias toward maximum monetary stimulus. We still retain a bearish view of USD-JPY. Richly valued global stock markets look vulnerable, given trade concerns and with Q2 corporate reports expected to show an earnings recession. USD-JPY has support at 107.70-72, and resistance at 108.32-35.

    [GBP, USD]
    The Pound has consolidated gains it saw last last week news that backbench members of parliament passed an amendment, by a solid majority of 41, aimed at preventing the new prime minister from "proroguing" (i.e. suspending) parliament as a means to force a no-deal Brexit. It may still be possible for the new PM -- which is almost certain pro-no-deal-Brexit Boris Johnson -- to pull off a proroguing manoeuvre, but the new amendment will make it difficult. This in turn could increase the odds for Boris, assuming he is anointed as the new leader tomorrow, to risk calling a new general election, which some recent polls suggest would restore him as PM with Conservative Party majority of around 40. Given this, we don't advise taking a bullish view of the Pound at this juncture. Cable has resistance comes in at 1.2520-23.

    [USD, CHF]
    EUR-CHF printed a two-year low at 1.1013 on Friday, reflecting Euro underperformance as markets anticipate the ECB to gear-shift to an explicit easing bias at its meeting this Thursday, which would lay the groundwork for an easing in September. This puts the 2017 low at 1.0632 back in the frame, which will be displeasing to the SNB. The Swiss central bank'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 has found a footing after posting a nine-month low at 1.3016 last Thursday, with markets phasing out expectations for an outsized 50 bp rate cut by the Fed at its upcoming FOMC, which has return support to the U.S. currency. This helped offset any impact that the recent spike in oil prices (following news that a British tanker was seized by Iran in the Straits of Hormuz) might have had on the Canadian Dollar. Taking a step back, USD-CAD is amid an overall bear trend that's been unfolding since late May, with the pair having posted a lower weekly low for seven consecutive weeks. Trend resistance comes in at 1.3064-66. As for the BoC, the central bank maintained a neutral bias at its policy meeting this month 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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