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By XE Market Analysis June 17, 2019 3:36 am
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    XE Market Analysis: Europe - Jun 17, 2019

    Narrow ranges have been prevailing in quiet early-week trading, with the Dollar consolidating a recent phase of outperformance. Stock markets have been mixed in Asia, while S&P 500 futures are showing modest declines. The FOMC, BoJ, and BoE all meet this week and though none are expected to change rates, markets will be eager to gauge any shift in tone. The evolving Fed policy outlook has led the recent charge in expectations that major central banks will maintain their accommodative policy postures, if not suggest a more dovish stance, with the futures pricing in a cut as soon as July, thanks to rising tensions in the Middle Ease, elevated uncertainties over a U.S.-China trade deal, signs that the tariffs are weighing on growth, and and low inflation. For now, expectations for monetary policy accommodation have been underpinning global stock markets. EUR-USD has been plying a narrow range in the low 1.1200s, holding within the range seen on Friday and consolidating above the low seen then at 1.1202, which followed above-forecast prints in U.S. retail sales and production data. USD-JPY managed to eke out a six-day high at 108.70 after a turn of yen selling. Cable has remained heavy, though has so far managed to hold just above the near three-week high seen on Friday at 1.2580. The Dollar has also been consolidating recent gains against the Australian and Canadian Dollars.

    [EUR, USD]
    EUR-USD has been plying a narrow range in the low 1.1200s, holding within the range seen on Friday and consolidating above the low seen then at 1.1202, which followed above-forecast prints in U.S. retail sales and production data. Fed easing expectations look to have plateaued (Fed funds futures now fully discounting a 25 bp rate cut by the July FOMC), while the Dollar has in recent sessions been lifted as geopolitical tensions generate demand for U.S. Treasuries, which are the highest yielding risk-free assets available. As for the Euro, rising pressure on the ECB to entertain a further easing in monetary policy has put a cap on the currency following a recent spate of advancement. For now, we anticipate EUR-USD's directional bias will remain to the downside, assuming trade and geopolitical tensions remain elevated. EUR-USD has resistance at 1.1260, and support at 1.1200-02.

    [USD, JPY]
    USD-JPY managed to eke out a six-day high at 108.70 after a turn of yen selling. A backdrop of risk-on positioning has been weighing on the Japanese currency, in accordance with the usual inverse correlative pattern, with markets anticipate major central banks to maintain their accommodative policy postures, if not suggest a more dovish stance. The Fed, BoJ, and BoE all meet this week and though none are expected to change rates, markets will be eager to gauge any shift in tone. In Japan, the BoJ meets on Wednesday-Thursday, and is widely expected to maintained unchanged policy. Governor Kuroda last week told Bloomberg that the central bank had further tools in its stimulus toolkit, though he said further stimulus was not needed currently. In data, the May trade report (Wednesday) should see the prior JPY 56.8 bln surplus flip to a JPY 1,000 bln deficit. May national CPI (Friday) should see overall inflation fall to 0.6% y/y from 0.9%, while on a core basis, we expect a 0.5% y/y reading versus 0.9% in April. In the scenario that U.S.-China trade tensions continue to simmer and entrench, we would expect USD-JPY to resume a downward path. Resistance comes in at 108.80-85.

    [GBP, USD]
    The Pound has been relatively steady in recent sessions versus the other major currencies, on net, though has retained a heavy tone for want of buyers. This comes after a five-week phase of Brexit-related underperformance as markets factored in the delayed Breixt process, the success of the Brexit Party in the EU parliamentary elections in the UK, and the forced resignation of Theresa May. The Brexit process is now frozen as the Conservatives go about the business of selecting a new party leader/prime minister. Boris Johnson remains the strong favourite. Whoever it is, the new PM should be installed in No.10 by the end of July, little more than three months until the October 31 Brexit deadline. Given that there has been no sign that the EU will give any ground on the Northern Ireland backstop issue, the new PM will find themselves in exactly the same predicament/quagmire that consumed Theresa May -- trying to find a politically viable Brexit solution as the the head of a weak minority government in a deeply divided parliament, facing an uncompromising EU. If Boris, a notorious opportunist, is the new PM, then we can expect he would try and use the credible threat of leaving the EU without a deal in the hope of shifting Brussels out of its red lines. If this endeavour were to fail, which we assume it would, we think he would then call a general election in the hope of stealing the thunder of the newly formed Brexit Party (which dominated EU parliamentary elections in the UK), looking for clear a mandate both for his prime ministership and for a no-deal Brexit. This backdrop should maintain the pound's Brexit discount, which we estimate to have oscillated between 10 and 15% in trade-weighted terms since the vote to leave the EU in June 2016. Cale has resistance at 1.2693-95.

    [USD, CHF]
    EUR-CHF dropped back to the 1.1200 area last week from a two-week high at 1.1264. The decline was driven by the Swiss Franc, which rallied in the wake of the SNB policy announcement last Thursday. There didn't appear to be a specific catalyst, and the SNB's message was in fact dovish, stating that downside risks to the economy have increased and that the overall policy setting "remains as expansionary as before." The central bank also nudged its inflation forecast lower, now expecting CPI to average just 0.6% y/y this year, 0.7% in 2020, and 1.1% y/y in 2021. The currency had weakened earlier last week as market participants eyed the policy decision, so the price action looks to have been a buy-the-rumour-sell-the-fact type of reversal. With the ECB increasingly under pressure to ease policy again, the SNB remains eager to counter Franc appreciation, especially against the Euro. UR-CHF posted a 23-month low at 1.1119 earlier in the month. Assuming U.S.-led trade tensions continue, and assuming the ECB remains on the path of further monetary policy easing, we would expect EUR-CHF retain a directionally downward bias. The SNB's -0.75% deposit rate and policy of tactical intervention hasn't been sufficient to arrest recent appreciation of the Franc.

    [USD, CAD]
    USD-CAD printed an 11-day high on Friday at 1.3422, putting in some more distance from the 12-week low earlier in the month at 1.3243. Softer oil prices, which are down by over 16% from levels seen a month ago, have imparted a downward spin on the Canadian currency, even though the improvement in U.S.-Mexican relations bodes well for the new yet-to-be-Congressionally-ratified North American trade agreement. USD-CAD has support 1.3350.

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