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By XE Market Analysis May 16, 2018 3:05 am
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    XE Market Analysis: Europe - May 16, 2018

    The dollar has been buoyed by rising U.S. Treasury yields. The U.S. 10-year T-note hit a seven-year high above 3.03% while Fed funds futures were, as of the PM session on Wall Street yesterday, fully pricing in at 25 bp tightening at the June 12th-13th FOMC while discounting about 80% odds for another quarter point hike by September. EUR-USD posted a five-month low at 1.1816 in the latest phase of dollar buying. USD-JPY saw a 13-week high at 110.45 during the New York PM session yesterday, since settling in the lower 110.00s. The dollar has also posted gains versus the dollar bloc units, and most other currencies. Markets will be highly attentive of incoming U.S. data and Fed speakers, of which there are a further batch scheduled to talk today. Geopolitical issues also remain of heightened interest in the Mideast and on the Korean peninsular, with Pyongyang having suspended high-level talks with Seoul.

    [EUR, USD]
    EUR-USD broke lower and posted a five-month low at 1.1816 in the latest phase of dollar buying, which has been driven by a spike in U.S. Treasury yields. The 10-year T-note hit a seven-year high above 3.03% while Fed funds futures were, as of the PM session on Wall Street yesterday, fully pricing in at 25 bp tightening at the June 12th-13th FOMC while discounting about 80% odds for another quarter point hike by September. EUR-USD has resistance at 1.1910-12, and trend support comes in at 1.1743-44.

    [USD, JPY]
    USD-JPY has settled in the lower 110.0s after posting a 13-week high at 110.45 during the New York PM session yesterday. The new high was largely a reflection of broad dollar buying, which has been concomitant with an ongoing spike in U.S. yields, with the 10-uear T-note yield ascending to seven-year high over 3.03%. Strong data out of the U.S. has also been the mix, including yesterday's retail sales and Empire State manufacturing releases, while today's preliminary Q1 GDP report out of Japan disappointed, at -0.6% q/q, with Q4 data revised to 0.6% q/q growth from 1.6% q/q growth. The Japanese data follows a Reuters survey finding that almost half of respondents expecting the BoJ to maintain ultra-accommodative monetary policy until 2020, which starkly contrasts Fed policy direction. We advise trend following for USD-JPY. Support is at 110.01-03, which encompasses former range highs.

    [GBP, USD]
    Sterling has been trading mixed so far this week, losing ground to the resurgent dollar while gaining versus both the euro and yen, with UK labour data having yesterday returned some support to Her Majesty's currency. The data showed expected perkiness in pay growth (of 0.4% y/y in inflation adjusted terms in the ex-bonus figure) and a data-series low in the employment rate (75.6%) and a decline in the economically inactive rate (to 21.0%). With productivity lagging, expectations for a resumption of gradual BoE tightening later in the year should find some renewed support. We have been calling for a 25 bp hike in the repo rate at the August MPC meeting. We don't recommend holding a long exposure to Cable, however, given comparatively strong Fed tightening expectations. Resistance is at 1.3545-50, and support at 1.3451-55.

    [USD, CHF]
    EUR-CHF has taken a sharp knock lower, dragging lower by fresh EUR-USD selling, which has generated euro supply. The cross posted a five-week low at 1.1826, making this the biggest intra-week decline that has been seen since early February. Given that EUR-CHF is a good proxy of the Swiss franc's trade weighted value, and given Swiss policymakers view of the currency has still being overvalued, the latest price action won't been pleasing to the SNB. SNB Vice Chairman Zurbruegg said earlier this week that the franc is still "highly valued" and that the central bank sees "no reason" to give up the negative interest rate or "our willingness to intervene in the foreign exchange market."

    [USD, CAD]
    USD-CAD lifted to a three-week high of 1.2914 yesterday amid the broader phase of U.S. dollar buying. A pullback in oil prices also helped, which may have headed off potential demand for the Canadian dollar. The gain extends the rebound from the three-week low that was seen last week at 1.2719. The disappointing April employment out of Canada, in data released on Friday, which weakened BoC tightening expectations, helped give the pair a prop. The Canadian calendar has a flurry of releases from today through to the end of the week, culminating in April CPI data on Friday. .

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