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By XE Market Analysis June 26, 2019 3:17 am
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    XE Market Analysis: Europe - Jun 26, 2019

    The Dollar has steadied after rising late yesterday at the prompt of remarks from Fed Bullard who, although a dove by reputation, said that a 50 bp rate cut in July would be "overdone." This was taken by markets as a walk back of aggressive easing expectations. While giving the dollar a lift, the remarks nudged Treasury yields higher and pushed Wall Street lower. The S&P 500 closed 0.9% for the worse. U.S. index futures and Asian stock markets have been mixed in a sputtering price action after rallying strongly last week. EUR-USD has settled in the mid 1.1300s, down from the three-month peak seen yesterday at 1.1412. USD-JPY extended to a two-day peak at 107.50 during Tokyo trade. Markets will remain focused on the frictions with Iran and China, as well as Fed and other central bank policy, the outlooks for which are amid a dynamic phase as they motion towards fresh accommodation. Comments from the U.S. administration late Tuesday suggested a deal with China won't be made as soon as this weekend's G20 summit, but there is still hope the two sides will agree to continue talks. And while Bullard largely took an aggressive rate cut off the table for next month Fed Chairman Powell left door open as he yesterday reiterated policymakers are monitoring conditions as they grapple with the whether the many uncertainties will weigh on the outlook and necessitate more stimulus.

    [EUR, USD]
    EUR-USD has settled in the mid 1.1300s, down from the three-month peak seen yesterday at 1.1412. Fed Bullard, although a dove by reputation, said that a 50 bp rate cut in July would be "overdone," which sparked a reassessment of Fed easing expectations in markets, pushing Treasury yields lower, lifting the Dollar, while knocking Wall Street lower. The Dollar still has potential to revert as a safe-haven currency should the geopolitical backdrop deteriorate, which is a risk (re U.S. vs Iran and U.S. vs China), though for now dynamics in yield differentials is the dominant factor driving market positioning. Another potential, indirect, support for the Dollar against the Euro is the counterbalance of expectations for ECB easing, although with Bund yields having long since gone negative there is greater scope for Treasury yields to narrow the gap further than for Bund yields to drive a further widening. 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. Support comes in at 1.1344-47.

    [USD, JPY]
    USD-JPY extended to a two-day peak at 107.50 during Tokyo trade, driven by the Fed's tempering of market expectations for aggressive rate cuts. Assuming that the U.S and China continue to struggle to find a resolution, and assuming U.S.-Iran tensions continue to simmer, we would expect USD-JPY, and more especially AUD-JPY, to return to a downward trajectory. Last week's five-month low at 73.92 provides a downside waypoint with regard to AUD-JPY.

    [GBP, USD]
    The Pound in trade-weighted terms has managed to find a tentative footing in recent sessions after a multi-week phase of underperformance as markets discounted the expected economic consequences of the prolonged Brexit and political uncertainty in the UK. The BoE last week trimmed its Q2 GDP growth estimate to 0.0% q/q from 0.2% while stating that inflation remains well anchored, although still retaining guidance for gradual tightening over the three-year forecast horizon (which assumes a smooth and orderly Brexit process). We estimate that sterling 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 1.2677-80.

    [USD, CHF]
    EUR-CHF has found a footing after coming under signifiant pressure last week in the wake of ECB President Draghi's eyebrow raising dovish shift, 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 before recouping to levels around 1.1100. The advance of the Franc against the Euro will doubtlessly be displeasing to 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 has come under some pressure amid a 2%-plus surge in oil prices today, which has been a buying cue for the Canadian Dollar. This has offset the Fed's walk back of easing expectations in markets, which has otherwise been supporting the U.S. buck. USD-CAD has dropped back towards last week's four-month low at 1.3151 from the upper 1.3100s. A new trend low would reaffirm the bear tend that's been unfolding since early May. We advise trend following, anticipating further downside progress, assuming that both the Fed remains on its overall dovish course and that U.S.-Iran tensions remain elevated, which should in turn keep oil prices underpinned. USD-CAD has resistance at 1.3240-45.

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