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By XE Market Analysis May 15, 2014 2:32 am
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    XE Market Analysis: Europe - May 15, 2014

    USD majors posted narrow ranges during pre-Europe Asian trade. EUR-USD flat-lined around 1.3710-20, as it did for most of Wednesday. USD-JPY saw a brief dip to a low of 101.66 following a much stronger than expected initial estimate of Japanese Q1 GDP of 5.9%, though this was evidently driven by a surge of big ticket consumer purchases ahead of the sales tax hike in April. USD-JPY subsequently returned to near net unchanged levels around 101.80-90. AUD-USD made time within 0.9360-80, consolidating after failing to sustain gains to one-month highs above 0.9400 on Wednesday. Cable was virtually motionless, around 1.6770, consolidating the losses seen after yesterday's BoE Inflation Report.

    [EUR, USD]
    The EUR-USD market has turned sharply bearish, which had been in evidence by the lack of rebounds following the sharp ECB-induced losses since last Thursday. A UBS research note, for instance, argues EUR-USD will fall to sub-1.3400 levels over the coming four weeks, based on forecasts for May Eurozone CPI and the May U.S. payrolls report, along with ECB action at its June policy meeting (UBS anticipates that the depo, refi and marginal rates will all be trimmed by 15 bp, but also argues that a narrower easing would still be a euro-selling catalyst). Resistance is now marked at 1.3774-80 (which encompasses the Apr-30 low) and 1.3800-15. On the downside, the Apr-4 low at 1.3672 offers the next target.

    [USD, JPY]
    USD-JPY remains entrenched amid a broad sideways range, roughly contained within 100.00-105.00, which has been in place since early January. This stasis may persist for some time, though technical analysts will be marking this as a potential topping formation after the steep rally from levels around 75.0 that was seen during the second part of last year.

    [GBP, USD]
    Wednesday's disappointing labour market report and more especially the BoE May Inflation Report, which unexpectedly left GDP and CPI projections largely unchanged while signalling that there remains no rush to hike interest rates, were game changes for sterling. The market had clearly got ahead of itself with regard to BoE tightening expectations. While the labour report wasn't exactly bad, with unemployment dipping to a new cycle low of 6.8% from 6.9%, the claimant data pointed to a slackening in the pace of decline while average income data unexpected dipped to 1.3% y/y, below CPI inflation, which is 1.6%. This backs up BoE arguments that there remains a good degree of slack in the economy. We look for Cable to revisit 1.6700 and below, though we don't anticipate too much potential for sustained losses below 1.6500.

    [USD, CHF]
    EUR-CHF has re-established a sideways direction anchored around 1.2200, having recovered from a recent foray to the mid-121s. The cycle low of 1.2104 and 1.2100 are key support levels. The threat of SNB intervention into its 1.2000 limit peg is helping to deter franc buying to some extent. SNB's Jordan repeated recently that the central bank remains committed to defending the currency cap.

    [USD, CAD]
    USD-CAD firmed back to around 1.0900 after running to a low of 1.0812 on Friday. The pair has been in a correction/consolidation phase since late January following a four-month rally period from sub-0.9700 levels. The still-dovish outlook for BoC policy seems to be putting a limit on the CAD's upside. We expect a choppy, sideways bias in USD-CAD.

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