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By XE Market Analysis June 20, 2018 2:49 am
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    XE Market Analysis: Europe - Jun 20, 2018

    A pause in risk-off sentiment has seen stock markets recovery some lost ground in Asia and the yen weaken as markets unwound some of the Japanese currency's safe haven premium. Dollar bloc currencies have rebounded, with AUD-JPY, a cross that often correlates inversely with pronounced directional swings in global stock markets, has rallied by 0.5%. Emerging market currencies have also lifted after many posted new year lows yesterday. USD-JPY lifted to a two-day high of 110.25, putting a little distance in from yesterday's 10-day low at 109.55 and returning the pairing to about the midway point of the range that's been seen since the beginning of last week. EUR-USD has been trading in a narrow range in the upper 1.1500s, capped below 1.1600 level. In stock markets, Wall Street pare the worst of intraday losses yesterday, while Asian bourses gained, with the main Chinese indexes more than recovering intraday losses. Despite the lift in stock markets, the Sino-U.S. trade spat is likely remain a concern for investors, with both the Trump administration and Beijing looking entrenched in opposing positions.

    [EUR, USD]
    EUR-USD recovered to the upper 1.1500s after posting a three-week low at 1.1531 yesterday following dovish-tilting remarks from ECB policymakers yesterday. ECB President Draghi said yesterday that "we will be patient will the timing of the first and will take a gradual approach... thereafter." We had been advocating fading EUR-USD gains in the wake of the ECB's dovish-tilting guidance of last week, which put emphasis on the Fed's tightening path. After a two-week hiatus, the sharp declines since last Thursday have reaffirmed a down trend that's been in evolution since mid April. The weekly close on Friday below the previous weekly close at 1.1659 is consistent with Dow Theory's definition of a bear trend. EUR-USD has resistance is at 1.1597-1.1600.

    [USD, JPY]
    USD-JPY lifted moderate amid a steadying in stock markets in Asia, even though the Sino-U.S. trade spat is likely remain a concern for investors, with both the Trump administration and Beijing looking entrenched in opposing positions. The pair has printed a high of 110.25, which put a little distance in from yesterday's 10-day low at 109.55. Fundamentals remain unambiguously bullish, given the Fed's course for further monetary policy tightening and the BoJ likely to remain committed to ultra-accommodative policy -- including the pegging of 10-year JGB yields at near 0% -- well into 2019, and even 2020. However, we still would advise fading USD-JPY gains given the heightened potential for further bouts of risk-off conditions in global markets as the trade war evolves.

    [GBP, USD]
    Cable has lifted off lows. The pound has been under general pressure lately as market participants anticipate this week's BoE MPC meeting to hold policy unchanged while acknowledging a run of weaker data, the net result of which will likely be to push expectations for a 25 bp rate hike to the November MPC meeting, away from the August meeting. Brexit-related uncertainty remains in the mix, with a divided government still -- believe it not, nearly two years after the referendum -- hammering out what type of Brexit -- soft or hard -- it wants, and whether parliament will have a final vote on the deal made with the EU (on divorcing terms and the future relationship). Regarding Cable, we continue to advise trend following. Resistance comes in at 1.3216-20.

    [USD, CHF]
    EUR-CHF has settled back above 1.1500 after printing a three-week low at 1.1487 yesterday. The cross has been under pressure since the ECB's dovish guidance signal of last Thursday. EUR-CHF is now about midway levels of the range that's been seen over the last three weeks. The ECB's policy stance should ensure that the SNB remains resolutely committed to its ultra-accommodative monetary policy setting in an attempt to ward off, or at least limit, franc gains against the euro.

    [USD, CAD]
    USD-CAD is up for a fifth consecutive session, printing today a fresh one-year high at 1.3290. The new high comes with trade tensions ratcheting up another gear with Trump threatening to levy a further tariffs on $200 bln worth of Chinese imports. This has hit the dollar bloc currencies, and follows the unexpectedly hawkish Fed guidance last week. We retain a bullish view of USD-CAD, partly on the Fed versus BoC policy outlook, and on the view that trade tensions are likely to drag for the foreseeable. Support is at 1.3227-30.

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