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By XE Market Analysis July 25, 2019 3:25 am
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    XE Market Analysis: Europe - Jul 25, 2019

    The Dollar majors have settled in narrow ranges into the ECB's policy meeting, with markets giving about 50% odds for the central bank producing a 10 bp rage cut today following yesterday's manufacturing PMI disappointments in the Eurozone. The Euro went into a consolidation after declining sharply yesterday. EUR-USD settled in the lower-to-mid 1.1100s, holding above the two-month low seen yesterday at 1.1127. Sub-forecast U.S. manufacturing PMI data out the U.S. provided some balance. EUR-JPY and EUR-GBP saw similar stabilization, though EUR-CHF carved out a fresh 24-month low at 1.0965 in pre-Europe trading in Asia. Elsewhere, AUD-USD printed a two-week low at 0.6964 after RBA Governor Lowe said a sustained period of low rates is likely, which follows back-to-back rate cuts in June and July that have taken the benchmark rate to a record low. USD-JPY has settled in the lower 108.0s, holding below the nine-day high seen earlier in the week at 108.29. Global stock markets have been buoyed by expectations for monetary policy stimulus at the Fed, ECB, and other central banks, while the prospect of trade talks between the U.S. and China has provided an added support. Semiconductor stocks hit a record high yesterday on Wall Street, aided by earnings. Some 78% of S&P500 companies that have reported Q2 earnings so far have beaten estimates. Facebook announced forecast-beating revenues after the close yesterday.

    [EUR, USD]
    The Euro posted fresh lows as markets anticipate the ECB policy announcement, which most narratives putting about a 50-50 chance for a 10 bp rate cut today, with a gear shift to an explicit easing bias seen as a certainty. EUR-USD printed a new two-month low at 1.1122, making this the fifth consecutive daily decline. EUR-JPY posted a fresh near-seven-month low, while EUR-CHF saw a new 24-month low. Yesterday's manufacturing PMI disappointments in preliminary July data, together with the increased odds for a no-deal Brexit scenario, have piled pressure on the ECB to ease policy. There may be a brief euro rally in the event that the ECB refrains from easing today, although dovish guidance should curtail the currency's upside potential. EUR-USD has support at 1.1105-07, and resistance at 1.1204-06.

    [USD, JPY]
    USD-JPY has settled in the lower 108.0s, holding below the nine-day high seen earlier in the week at 108.29. We retain a bearish view of USD-JPY. Support comes in at 107.70-72, and resistance at 108.32-35.

    [GBP, USD]
    Sterling has seen some chop but is trading net neutrally after ascending amid a short-covering fuelled rally yesterday. Cable settled near net unchanged on the day near 1.2480 bid after zigging to a 1.2465 low and zagging to a 1.2492 high. A substantial net short position had built up in recent weeks as market participants anticipated Boris Johnson becoming the new UK prime minister, along with the increased odds for a no-deal Brexit scenario that he brings. Cable hit a high at 1.2522 yesterday before running out of steam. Tuesday's low is at 1.2418, and last week's 27-month low is at 1.2382. There remain plenty of endogenous reasons to be bearish with regard to sterling. Not least is the likelihood of the BoE taking a dovish turn at next month's MPC meeting while downwardly revising GDP projections in its quarterly Inflation Report. And, given the new PM, and the thinking displayed by MPC member Saunders in a Bloomberg interview on Tuesday, the central bank looks almost certain to elevate the possibility for a no-deal, disorderly Brexit from a footnote caveat to a more seriously considered risk. There is also the possibility that Boris will call a new general election, having promised big things but who now finds himself the head of a weak minority government, which is split on Brexit and in a deeply divided parliament. Cable has resistance at 1.2520-23.

    [USD, CHF]
    EUR-CHF carved out a fresh 24-month low at 1.0965 as markets anticipate the ECB to gear-shift to an explicit easing bias at its meeting today, with markets also pricing in about a 50% chance of a 10 bp rate cut. 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. For now, we anticipate that EUR-CHF's directional bias will remain to the downside.

    [USD, CAD]
    USD-CAD has settled back in the lower 1.3100s after scaling to a one-month high at 1.3164 earlier in the week. The pair has found a footing in recent sessions after posting a nine-month low at 1.3016 last Thursday. Markets have phased out expectations for an outsized 50 bp rate cut by the Fed at its upcoming FOMC, which has returned some support to the U.S. currency. 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." USD-CAD posted a lower weekly low for seven consecutive weeks, though this week has ascended through trend resistance at 1.3064-66, improving the odds for the pair holding steady or firmer in the coming days and weeks.

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