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By XE Market Analysis June 21, 2019 4:12 am
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    XE Market Analysis: Europe - Jun 21, 2019

    USD-JPY fell for a third day and posted a fresh five-month low at 107.04. A combo of ramped-up expectations for Fed rate cuts, coupled with a rekindling risk-off vibe in global markets amid concerns about the escalation in U.S.-Iran tensions, pushed the pairing lower. While Wall Street closed higher yesterday amid the continued glow of expected Fed accommodation, sentiment has spoiled today in Asia, while S&P 500 futures posted moderate losses. This revived some safe-haven demand for the yen. EUR-JPY printed a three-week low, and AUD-JPY saw losses, although remained above recent trend lows. Elsewhere, the dollar managed to find its feet after the spate of Fed-induced declines. EUR-USD ebbed back under 1.1300 after a two-day rally left a nine-day high at 1.1317 yesterday. Cable similarly dipped, back under 1.2700, correcting from the nine-day high seen yesterday at 1.2727. USD-CAD also found a toehold after plunging sharply to a near four-month low at 1.3151, a move that was partly driven by yesterday's 7%-plus surge in oil prices.

    [EUR, USD]
    EUR-USD ebbed back under 1.1300 after a two-day rally left a nine-day high at 1.1317 yesterday. This reflected the dollar finding its feet after the spate of Fed-induced declines. We had been cautioning that upside momentum was likely to fade given competing dovish arguments at the ECB and other major central banks, which should presumably curtail the U.S. currency's downside potential. ECB's members De Guindos, Rehn and Knot, for instance, yesterday reaffirmed dovish messages, following the lead of central bank president, Draghi, earlier in the week. BoJ Governor Kuroda, too, yesterday strongly emphasized during his post-meeting press conference (following the widely anticipated decision to leave policy unchanged) that the central bank "won't hesitate" to consider further monetary easing if necessary. 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 1.1347-50.

    [USD, JPY]
    USD-JPY fell for a third day and posted a fresh five-month low at 107.04. A combo of ramped-up expectations for Fed rate cuts, coupled with a rekindling risk-off vibe in global markets amid concerns about the escalation in U.S.-Iran tensions, pushed the pairing lower. While Wall Street closed higher yesterday amid the continued glow of expected Fed accommodation, sentiment has spoiled today in Asia, while S&P 500 futures posted moderate losses. This revived some safe-haven demand for the yen. EUR-JPY printed a three-week low, and AUD-JPY saw losses, although remained above recent trend lows. Assuming Mideast geopolitical tensions remain a global market influencer, we would expect USD-JPY to remain downwardly biased.

    [GBP, USD]
    Cable has lost upside traction after posting a nine-day high at 1.2727. The BoE yesterday trimmed its Q2 GDP growth estimate to 0.0% q/q from 0.2% while stating that inflation remains well anchored, although retaining guidance for gradual tightening over the three-year forecast horizon (which assumes a smooth Brexit process). 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. Cable 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 23-month low at 1.1057 yesterday before recouping to the lower 1.1100s. 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 this month 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. Assuming the ECB remains on the path of further monetary policy easing, we would expect EUR-CHF retain a declining 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 found a toehold after plunging sharply to a near four-month low at 1.3151, a move that was partly driven by yesterday's 7%-plus surge in oil prices. Sharp oil price movements tend to impact the Canadian Dollar given its potential impact on Canada's terms of trade. Given the Fed's dovish turn, and assuming that U.S.-Iran tensions remain elevated, we would expect USD-CAD to remain heavy. Resistance comes in at 1.3240-45.

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