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By XE Market Analysis June 13, 2014 2:33 am
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    XE Market Analysis: Europe - Jun 13, 2014

    GBP surged on hawkish BoE speak with BoE's Carney signalling at a keynote speech last night that interest rates could rise sooner than markets expect and that the housing market was now "the greatest risk to the domestic economy." This will invite markets to re-price in a 25 bp hike before year-end. Carney's comments also chime with recent remarks by his MPC colleague, Weale, who has argued that small, incremental rate rises would be better started sooner rather than later if potentially disrupting bigger and more sudden tightenings were to be avoided further down the road. Cable surged over two big figures to a high of 1.6972, and EUR-GBP dove below 0.8000. We expect sterling to remain a buy on dips into the London session with the BoE policy stance now standing in sharper contrast to that of the Fed and ECB. Elsewhere, EUR-USD was steady in the mid-1.35s, and USD-JPY recovered to the 102.00 area after dipping to a 101.60 low in the New York PM session. The BoJ left policy unchanged at its meeting today.

    [EUR, USD]
    EUR-USD rebounds have remained muted after edging out a new low at 1.3512 yesterday. Last week's post-ECB low of 1.3503 remains the key near-term target. Yield differentials remain a driven with the 10-year T-note pushing out toward 125 bp over Bund yields, with the spread already in eight-year high territory. We peg Wednesday's 1.3557 high as a key near-term resistance and risk level. A breach above this level would suggest nearer-term selling interest may have become exhausted, and suggest scope for a short-covering pop to 1.3600 and above. EUR-GBP, meanwhile, dove sharply following the unexpectedly hawkish remarks from BoE Governor Carney. The now sharply contrasting BoE and ECB policy stances suggests the cross will remain a sell-on-rallies, with scope seen toward 0.7500.

    [USD, JPY]
    USD-JPY recovered to the 102.00 area after dipping to a 101.60 low in the New York PM session. The BoJ left policy unchanged at its meeting today. USD-JPY pair remains entrenched amid a broad sideways range, roughly contained within 100.00-105.00, which has been in place since early January. This stasis may persist for some time yet, though technical analysts will be marking this as a potential topping formation after the steep rally from levels around 75.0 that was seen during the second part of last year.

    [GBP, USD]
    GBP surged on hawkish BoE speak with BoE's Carney signalling at a keynote speech last night that interest rates could rise sooner than markets expect and that the housing market was now "the greatest risk to the domestic economy." This will invite markets to re-price in a 25 bp hike before year-end. Carney's comments also chime with recent remarks by his MPC colleague, Weale, who has argued that small, incremental rate rises would be better started sooner rather than later if potentially disrupting bigger and more sudden tightenings were to be avoided further down the road. Cable surged over two big figures to a high of 1.6972, and EUR-GBP dove below 0.8000. We expect sterling to remain a buy on dips into the London session with the BoE policy stance now standing in sharper contrast to that of the Fed and ECB.

    [USD, CHF]
    EUR-CHF found a footing after making a one-month low of 1.2166 last week, though still holds below 1.2200. The break of a former uptrend channel support line at 1.2190 opened the way to the mid-1.21s. The cycle low of 1.2104 and 1.2100 are key support levels, but so far have remain unchallenged. We would expect that the threat of SNB intervention into its 1.2000 peg to deter franc buying below 1.2100. SNB's Jordan repeated recently that the central bank remains committed to defending the currency cap.

    [USD, CAD]
    USD-CAD broke to a 10-day low near 1.0850 after the recent consolidation above 1.0900 petered out. Price action remains bearish, with the pair edging out a fresh low today in Asia trade. This brings into scope the May lows at 1.0814-1.0822, which we mark as key support levels. Bigger picture, USD-CAD has been in a correction/consolidation phase since late January following a four-month rally period from sub-0.9700 levels. A moderate bear trend had started to emerge, but the still-dovish outlook for BoC policy should put a limit on the CAD's upside. We expect a choppy, sideways bias in USD-CAD over the coming period.

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