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By XE Market Analysis July 31, 2013 6:00 am
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    XE Market Analysis: Europe - Jul 31, 2013

    The ranges of the main currencies were narrow in pre-European Asian trade today. Markets were essentially on hold until the U.S. Fed's statement later on Wednesday, which is likely to confirm that QE is drawing to a conclusion while emphasizing that the exit will be managed according to how the economic recovery evolves. We also have the BoE and ECB policy decisions tomorrow and the U.S. jobs report on Friday. Overall, a recipe for non-committal trading in the meantime. Rumours of a ratings downgrade of France have also been circulating in the market this week.

    [EUR, USD]
    EUR-USD was 1.3258 bid just ahead of the European open, just a few pips above the London closing level yesterday. The pair saw a whip-saw price action yesterday, taking out the major option barrier level at 1.3300 before subsequently dipping quite sharply to a 1.3234 low. In the slightly bigger picture, the EUR looks to be in a bullish pennant formation that is signalling potential for a run to 1.3400 and above. Trend support comes in at 1.3240, ahead of 1.3200 and the 20-day moving average at 1.3280.

    [USD, JPY]
    USD-JPY was settled at 98.00-02, less than 10 pips below its Tuesday London closing level. Japan's manufacturing PMI for July disappointed at 50.7, following 52.3, but to little market impact. Support is marked at 97.76 (yesterday's low) ahead of 97.64, which is the one-month low that was logged on Monday. We expect the latter level to hold over the coming days, with a rebound to the 99.0-100.0 region anticipated following the Fed's meeting and Friday's U.S. jobs report.

    [GBP, USD]
    GBP has been a notable underperformer so far this week, dropping from levels just above 1.5400 on Monday to a 1.5199 low on Wednesday. The market is pricing in the formal adoption of forward guidance at the BoE's meeting this week (Thursday), which will be used as a method of better managing market expectations about the eventual exit from loose monetary policy settings. We expect the BoE will leave the repo rate and QE total unchanged but to announce a formal adoption of forward policy guidance. There may be some potential for an on-the-fact rebound in sterling. Resistance is pegged at 1.5257-60, which encompasses the 20-day moving average, while a near-term trend line target is 1.5135. Data today included a jump in U.K. consumer confidence to a three-year high, offset by 0.5% decline in the BRC shop prices measure, the lowest in six-and-a-half years and the third consecutive month of price deflation.

    [USD, CHF]
    USD-CHF remains in a bear trend, with a clear two-week trend line resistance coming in at 0.9304 and trend target of 0.9220. The Swiss calendar this week is highlighted by the KOF economic barometer, expected to improve to 1.21 (median same) after 1.16 in the previous month. This would signal improving economic momentum over the next six months. The SVME PMI survey for July is expected to show similar improvement, to 52.5 from 51.9. Although the fundamental outlook is improving we don't expect any softening in the SNB's commitment to maintain zero interest rates and its 1.20 limit cap in EUR-CHF.

    [USD, CAD]
    USD-CAD held above the key 1.0250 level this week, but recovery gains above 1.0300 proved fleeting and the overall bear trend looks to remain in play. Should the Fed refrain from making any explicit signal from QE, which we anticipate, and Canadian GDP meet our projection for a +0.3% in May, up from +0.1% in April, we would expect to see a fresh down phase in USD-CAD and a test of Monday's 1.0252 six-week low. Support levels are seen at 1.0275 and 1.0260 (Tuesday's low).

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