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By XE Market Analysis June 28, 2019 3:20 am
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    XE Market Analysis: Europe - Jun 28, 2019

    Narrow ranges have been prevailing among the dollar majors, with activity crimped by the looming G20 meeting and long-awaited meeting between Presidents Trump and Xi. Stock markets in Asia have traded modestly lower, while in forex markets the Yen posted fractional gains. This saw USD-JPY reverse most of yesterday's gains in printing a low at 107.56, while EUR-JPY edged out a two-day low. AUD-JPY was also softer, though by a lesser extent. The likes of EUR-USD, meanwhile, stuck to narrow range trading in the mid 113.00s, remaining off the one-month high seen earlier in the week at 1.1412. Sterling, which has been apt to underperform in recent weeks as markets factor in the consequences of prolonged Brexit related uncertainty, saw a little slippage, with Cable carving out a two-day low at 1.2665, while EUR-GBP posted a near-six-month high at 0.8981. A focus today will be on Eurozone preliminary June inflation data, which is expected to remain benign and leave the door open for further ECB policy stimulus down the road. The Trump-Xi showdown is schedule for tomorrow, which should curtail commitment in markets today.

    [EUR, USD]
    EUR-USD stuck to narrow range trading in the mid 113.00s. The pair has been gravitating to the 1.1350 area over the last couple of days after rotating lower on the Fed's walk-back of dovish guidance. The three-month peak seen Tuesday at 1.1412 has since remained unchallenged. Given the moderation in Fed tightening expectations, and with today's June Eurozone inflation data expected to remain on the benign side, there looks to be limited scope for further sustained EUR-USD gains for now. The dollar also has potential to revert as a safe-haven currency should the geopolitical backdrop deteriorate, which is a clear risk (re U.S. vs Iran and U.S. vs China). Regarding today's Eurozone preliminary June inflation data, we expect the headline Eurozone figure to come in at a benign 1.2% y/y, which would be unchanged from May, and which would leave the door open for further ECB policy stimulus down the road. 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. The Trump-Xi showdown is schedule for tomorrow, which should curtail commitment in markets today.

    [USD, JPY]
    The Yen posted fractional gains as stock markets in Asia posted moderate losses.This saw USD-JPY reverse most of yesterday's gains in printing a low at 107.56, while EUR-JPY edged out a two-day low. AUD-JPY was also softer, though by a lesser extent. 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.

    [GBP, USD]
    Cable carved out a two-day low at 1.2665, while EUR-GBP posted a near-six-month high at 0.8981.The price action is the latest phase of a multi-week phase of Sterling underperformance as markets discount expected economic consequences of the prolonged Brexit and political uncertainty in the UK. On the Brexit front, there has been news that a group of parliamentary members are working on a plan to prevent a no-deal Brexit by withholding government funding. This comes with Boris Johnson, the strong favourite to become the new prime minister, having made noises about circumventing parliament to achieve a no-deal Brexit (which ellicited a sharp criticism from former PM May). 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 support at 1.2650-52, and resistance at 1.2749-50.

    [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 is down for a fifth consecutive day and what is now the third weekly decline out of the last four weeks, today printing a new trend low (so far) at 1.3086. That is the lowest level seen since late January. The new low reaffirms the bear tend that's been unfolding since early May. We advise trend following, anticipating further downside progress on the assumption 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 1.3146-50.

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