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By XE Market Analysis June 22, 2018 2:51 am
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    XE Market Analysis: Europe - Jun 22, 2018

    The dollar has traded moderately softer so far today, extending a theme that has been seen since yesterday following the release of the Philly Fed index, which came in much weaker than expected. Amid this backdrop, the euro has corrected some of its recent losses against most other currencies, which has likely reflected short covering, although in a market still wary about the Italian government's Eurosceptic bias. EUR-USD has recovered back above 1.1600, posting a three-day high at 1.1638. The pair had yesterday printed an 11-month low at 1.1508. USD-JPY has settled near the 110.0 level, consolidating yesterday's losses after the pair posted a five-day high at 1110.75. Ahead today, focus will be on PMI survey data out of both Europe and the U.S., the evolving trade war, and the OPEC-plus-Russia meeting in Vienne, the run-in to which has exposed signs of discord among some members, which has pushed oil prices up.

    [EUR, USD]
    EUR-USD has recovered back above 1.1600, posting a three-day high at 1.1638. The pair had yesterday printed an 11-month low at 1.1508. We advise caution in following the euro higher as Italian politics has the potential to rock the euro boat, and seemingly on an ongoing basis. In the mix are the rising trade tensions, which are mostly impacting German auto makers. Mercedes-Benz maker Daimler warned yesterday that global trade tensions were already showing their sales. So far during the prevailing phase of worsening trade tensions the dollar has been rallying, different to prior episodes. Yield differentials remain a draw of the greenback against the euro and other currencies, with Fed Chairman Powell this week maintaining expectations for further rate hikes, contrasting to the slew of dovish-tilting remarks from ECB policymakers. We remain bearish of EUR-USD, and advise fading gains. Resistance is at 1.1640-44..

    [USD, JPY]
    USD-JPY has settled near the 110.0 level, consolidating yesterday's losses after the pair posted a five-day high at 1110.75. The pair is at about the midway point of the broadly sideways range that's been seen over the last two months, with price action having reflected bullish fundamentals during upswings and reflecting demand for the safe haven yen during downswings. More of the same looks likely. While fundamentals may remain unambiguously bullish (contrasting Fed vs BoJ policy paths), the risk of another phase of acute risk aversion in global markets is palpable (worsening trade dispute), will giving the yen -- the forex market's safe haven currency of choice -- a bid.

    [GBP, USD]
    Cable rallied strongly on yesterday's BoE announcement and minutes, gaining nearly two big figures in making a high of 1.3282 (which, by our data, is 2 pips shy of the week's high). An increased rank of three MPC members calling for a 25 bp hike in the repo rate boosted both UK yields and the pound. Although still outnumbered to the tune of six, the dissenters have put a rate hike as soon as November back on the map. MPC member Ramsden, while voting for no change, has make clear in an media interview earlier in the month that he is a hawk in waiting. The minutes showed that most members are overlooking recent economic soft patch. The BoE made clear in its May Inflation Report that declining spare capacity and low productivity growth meant that gradual and measured monetary tightening will be warranted. We see Cable as more likely to form a range in the lower 1.30s than to commence a sustained rally.

    [USD, CHF]
    EUR-CHF has settled back above 1.1500 after printing a three-week low at 1.1487 earlier in the week. The cross was pressured from levels above 1.1600 in the wake of 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 has come off the boil after a one-wee run higher stalled at 1.3336 yesterday, which is a one-year high. Choppy oil prices into the OPEC meeting today have cast some impact on the Loonie. Last week's unexpectedly hawkish Fed guidance, a likely easing in oil supply quotas by OPEC and Russia, and ratcheting trade tensions have been a supportive mix of USD-CAD, which we expect to remain the case. Support is at 1.3227-30. Canada released CPI and retail sales data today. We expect CPI to climb to a 2.5% y/y pace in May from 2.2% in April -- a jump that would not alter the BoC's gradualism approach to tightening. We anticipate retail sales rising only 0.1% m/m in April after the 0.6% gain in March.

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