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By XE Market Analysis June 18, 2019 3:38 am
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    XE Market Analysis: Europe - Jun 18, 2019

    Sterling has hit fresh lows, and the Yen has remained bid amid a backdrop of continued sputtering in global stock markets. The Pound tumbled to fresh five-month lows against the dollar, Euro and Yen. Cable's low is 1.2512, with the pair showing a week-on-week decline of more than 1.5%. Markets are continuing to adjust to the recent ratchet higher in risks for the UK leaving the EU without an agreement on divorcing terms or an outline for a future trading relationship, which would see the nation adopt trading on WTO terms. This comes with Boris Johnson remaining the strong favourite to become the new prime minister. USD-JPY, meanwhile, carved out a two-session low at 108.25. EUR-JPY also declined, while GBP-JPY and AUD-JPY both printed new five-month lows. AUD-USD also fell to a five-month low, at 0.6833. The underperformance of the Australian follow was catalyzed by the release of the RBA minutes to the June policy meeting, which saw the central bank cut its cash rate to a record low of 1.25%. The minutes showed that the RBA is of a mind to ease policy again, as soon as July, given prevailing concerns about unemployment and disinflation. Elsewhere, the EUR-USD has maintained a narrow range in the lower-to-mid 1.1200s, so far holding within its Monday range. Market attention is turning to the Fed's FOMC meeting, which starts later today and concludes tomorrow. A two-and-a-half-year low in the Empire State business index has fanned expectations that the Fed will this week lay the groundwork for a rate cut as soon as next month.

    [EUR, USD]
    EUR-USD has maintained a narrow range in the lower-to-mid 1.1200s, so far holding within its Monday range. Market attention is turning to the Fed's FOMC meeting, which starts later today and concludes tomorrow. A two-and-a-half-year low in the Empire State business index has fanned expectations that the Fed will this week lay the groundwork for a rate cut as soon as next month. This backdrop should maintain an upward bias for now, though incoming Eurozone data are expected to provision a reminder that the pressure is also on the ECB to entertain a further easing in monetary policy, which should curtail the upside potential of EUR-USD. ECB's Coeure hinted yesterday that rate hikes and interest rate tiering may be on the agenda in the coming months, while his colleague De Cos is ready to act to give inflation a boost if necessary. EUR-USD has resistance at 1.1260, and support at 1.1200-02.

    [USD, JPY]
    The Yen has remained underpinned amid a backdrop of sputtering global stock markets. USD-JPY carved out a two-session low at 108.25. EUR-JPY also declined, while GBP-JPY and AUD-JPY both printed new five-month lows. In Japan, the BoJ meets Wednesday-Thursday, and is widely expected to maintain unchanged policy, attached with more-stimulus-if-needed-down-the-road guidance. Governor Kuroda last week told Bloomberg that the central bank had further tools in its stimulus toolkit, though he said further accommodation was not needed at the present juncture. In data, Japan's 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. We don't anticipate either the BoJ of this week's data releases will have much directional bearing on the Yen, which will be more sensitive to geopolitical and trade tensions and consequential ebb and flow of the Japanese currency's safe-haven premium. U.S.-China trade tensions have taken a back seat ahead of next week's G20 gathering, although the lack of preparatory ministerial-level meetings before the summit suggests that the best that could be hoped for is cordiality between the two sides. If not, we would expect USD-JPY to resume a downward path. The pair has resistance at 108.80-85.

    [GBP, USD]
    Sterling has opened the week with a heavy feeling. The currency has today tumbled to fresh five-month lows against the dollar, Euro and Yen. Cable's low is 1.2512, with the pair showing a week-on-week decline of more than 1.5%. Markets are continuing to adjust to the recent ratchet higher in risks for the UK leaving the EU without an agreement on divorcing terms or an outline for a future trading relationship, which would see the nation adopt trading on WTO terms. This comes with Boris Johnson remaining the strong favourite to become the new prime minister. There is no data of note out of the UK until May inflation and retail sales reports, due this Wednesday and Thursday, respectively. The BoE's Monetary Policy Committee meet this week, announcing Thursday, though no changes are widely anticipated in both actual policy and guidance. The Brexit process remains on ice as the the Conservative Party's leadership contest ensures. While Boris Johnson remains the clear favourite, there is an outside risk that his lead will be eroded as the sharp end of the process draws nearer. Most candidates, like Boris, are advocating a hard, no-deal-if-necessary Brexit. This backdrop should keep a lid on the pound. We estimate that the UK currency has been trading with a 10-15% trade-weighted Brexit discount since the vote to leave the EU in June 2016, and don't see much scope of this reversing anytime soon. Cale has resistance at 1.2600-05.

    [USD, CHF]
    EUR-CHF dropped back to the 1.1200 area after last week scaling a three-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 has settled near 1.3400, just below the two-week high seen last Friday at 1.3422. The high put in some more distance from the three-month low earlier in June 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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