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By XE Market Analysis June 20, 2019 4:41 am
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    XE Market Analysis: Europe - Jun 20, 2019

    The Dollar has rotated lower after the Fed span dovish in its guidance following the FOMC meeting. The USD index has dropped by 0.7% from pre-announcement levels to a low at 96.278, seen earlier in the pre-Europe Asian session, while EUR-USD has concurrently rallied by over 0.5% in making a six-day high at 1.1284. The biggest mover has been USD-CAD, which has dropped by nearly 1% in making a four-month low at 1.3228. A strong rally in oil prices has catalysed a strong bid for the Canadian Dollar. Front-month WTI crude prices are up by nearly 3% since the Fed's announcement, and are up by 5.7% from week-ago levels. AUD-USD printed a one-week high at 0.6909, as did Cable, at 1.2708. USD-JPY hit a five-month low at 107.46. The Fed left rates unchanged but shifted to an unambiguously dovish gear, noting that "uncertainties about this outlook have increased" while issuing a larger than expected downgrade in the dots as Chairman Powell refrained from using "transitory" to describe low inflation, marking a downshift in the inflation view. Some follow-through Dollar selling looks likely as the London interbank market enters the fray, though increasingly dovish arguments at the ECB and other major central banks should curtail the U.S. currency's downside potential.

    [EUR, USD]
    EUR-USD has posted a Fed-inspired, Dollar-selling driven rally, launching the pair to a six-day high at 1.1284. While the Fed left rates unchanged, it shifted to an unambiguously dovish gear, noting that "uncertainties about this outlook have increased" while issuing a larger than expected downgrade in the dots as Chairman Powell refrained from using "transitory" to describe low inflation, marking a downshift in the inflation view. Some follow-through Dollar selling looks likely from here, though increasingly dovish arguments at the ECB and other major central banks should curtail the U.S. currency's downside potential. BoJ Governor Kuroda, for instance, strongly emphasized during his post-meeting press conference today (following the widely anticipated decision to leave policy unchanged) that the central bank "won't hesitate" to consider further monetary easing if necessary. This follows ECB President Draghi's eyebrow-raising dovish about-turn earlier in the week. Near term, and above-median U.S. data would be the obvious risk to those running a speculative Dollar short exposure. Bigger picture, EUR-USD has been in a bear trend since early 2018, though downside momentum has abated markedly in recent months, with the pairing looking to have found a rough equilibrium or sorts. Resistance comes in at 1.1300-03.

    [USD, JPY]
    USD-JPY hit a five-month low at 107.46 following the Fed's dovish signal. We see scope for a rebound. For one, BoJ Governor Kuroda strongly emphasized during his post-meeting press conference today (following the widely anticipated decision to leave policy unchanged) that the central bank "won't hesitate" to consider further monetary easing if necessary. For two, the risk-on vibe in global stock and commodity markets, inspired by expectations for central bank accommodation, should set the scene for Yen underperformance, as per the usual inverse correlative relationship the Japanese currency has with stock market direction. The recent outbreak of cordiality on the U.S.-China trade negotiation front ahead of the G20 summit is also in the mx. USD-JPY has trend support at 107.10-13.

    [GBP, USD]
    Cable printed a one-week peak at 1.2708, buoyed by the generally softer Dollar following the Fed's dovish spin. The pound also saw an eight-day high versus the euro. In both cases the UK currency is rebounding from five-month lows that were see earlier in the week. UK inflation data for May, out yesterday, produced the expected decline in the headline CPI figure to a rate of 2.0% y/y from 2.1%. The BoE's Monetary Policy Committee June meeting is underway, where no changes are widely anticipated to be announced later today in both actual policy and guidance. 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 while the no-deal-Brexit-if-necessary Boris Johnson continues to look the prime minister in waiting. Cale has resistance at 1.2758-60.

    [USD, CHF]
    EUR-CHF has come under pressure in the wake of ECB President Draghi's dovish shift this week, which has been the most notable of a growing chorus of dovish voices on the central bank's governing council. The cross printed a two-week low at 1.1146, extending the decline from the one-month high seen on June 12 at 1.1264. The advance of the Franc against the Euro will doubtlessly be displeasing for the SNB) (the EUR-CHF cross being a good proxy on the Swiss currency's trade weighted value). The SNB restated at its quarterly policy review last week 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. With the ECB increasingly under pressure to ease policy again, the SNB remains eager to counter Franc appreciation, especially against the Euro. EUR-CHF posted a 23-month low at 1.1119 earlier in the month. 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 threat of tactical intervention hasn't been sufficient to arrest recent appreciation of the Franc.

    [USD, CAD]
    USD-CAD dove nearly 1% in making a four-month low at 1.3228, marking this pairing as the biggest mover (out of the main currencies) following the Fed's dovish signal yesterday. A strong rally in oil prices catalysed a strong bid for the Canadian Dollar. Front-month WTI crude prices are up by nearly 3% since the Fed's announcement, and are up by 5.7% from week-ago levels. We advise trend following USD-CAD. Support comes in at 1.3160, and resistance at 1.3266-68.

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