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By XE Market Analysis May 24, 2018 3:16 am
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    XE Market Analysis: Europe - May 24, 2018

    Yen outperformance has once again been seen, driving USD-JPY to a 10-day low of 109.33 and pushing EUR-JPY further into 10-month low territory. Belligerent rhetoric from North Korea and reports that the Trump administration is mulling a 25% levy on imported cars have provided some added fuel to risk aversion in global markets, which has maintained a safe haven bid for the Japanese currency. The dollar has also remained broadly buoyant, though has steadied off highs seen yesterday versus most currencies. EUR-USD posted a fresh five-month low at 1.1675 during the New York PM session yesterday before recouping above 1.1700 following the release of the FOMC minutes to the early May meeting showed the Fed is in no hurry to tighten. Fed funds futures gained a little on the minutes, and were still fully pricing in a 25 bp rate hike in June while showing about odds of about 75% for a further quarter-point hike move in September. Italy will remain in the spotlight and the risk remains that we see further paroxysms in Italian markets as investors digest the formulating policies proposals of the anti-establishment and Eurosceptic coalition government. We continue to take a bearish view of EUR-USD, anticipating declines to and below the 1.1500 level.

    [EUR, USD]
    EUR-USD posted a fresh five-month low at 1.1675 during the New York PM session yesterday before recouping above 1.1700 following the release of the FOMC minutes to the early May meeting showed the Fed is in no hurry to tighten. Fed funds futures gained a little on the minutes, and were still fully pricing in a 25 bp rate hike in June while showing about odds of about 75% for a further quarter-point hike move in September. The euro, meanwhile, has posted a fresh 10-month low against the outperforming yen, though the common currency has managed to find a toehold against other currencies. Italy remains in the spotlight and the risk remains that we see further paroxysms in Italian markets as investors digest the formulating policies proposals of the anti-establishment and Eurosceptic coalition government. Yesterday's preliminary PMI surveys out of the Eurozone also underwhelmed, pointing to a sustained slowing in the pace of economic growth. Overall, we remain bearish of EUR-USD. Trend resistance comes in at 1.1734-35.

    [USD, JPY]
    USD-JPY and yen crosses have posted fresh lows on continued outperformance of the Japanese currency. USD-JPY and AUD-JPY have led the way out of the main currencies with respective declines of 0.6%, while EUR-JPY is showing a loss of 0.5%. A risk averse mood has continued to drive the yen upward amid a backdrop of mostly lower stock markets in Asia, and an ebb in U.S. equity index futures. S&P 500 futures are down 0.2%, reversing some of yesterday's rebound gain that was seen during the PM session on Wall Street after FOMC minutes showed the Fed is in no hurry to tighten. News that the U.S. administration is weighing a 25% tax on imported cars to force concessions in NAFTA talks have weighed on investor sentiment, while the North Korea has reverted to character, with its vice foreign minister saying today that it will not "beg the U.S. for dialogue" while threatening that America will "taste an appalling tragedy," warning of a "nuclear-to-nuclear showdown" if talks fail. USD-JPY posted a low of 109.33, which is a 10-day nadir. EUR-JPY is trading at its lowest levels since last August. More of the same seems likely for now.

    [GBP, USD]
    Cable recovered above 1.3550, GBP-JPY has lifted above 147.00 and EUR-GBP had retraced under 0.8770 in what can best be described as a case of squaring of short positions. A GBP-JPY short was the trade du jour yesterday, having registered a loss of about 2% at the 145.95 intraday low, which is the most sunken the cross has been since the first week of March. While yesterday's UK April headline CPI unexpectedly ebbed to 2.4% from 2.5% y/y in March, the data can be downplayed to a degree because of the early timing of Easter this year, while rising oil prices, if sustained, can also be expected to exert upside influence on inflation rates. UK April retail sales data is due today, where we anticipate a 0.8% m/m rise in April (median 1.1%), which would mark a rebound after a steep 1.2% decline in March. The second estimate of UK Q1 GDP is due Friday, which should come in unrevised from the preliminary release outcomes of 0.1% q/q and 1.2% y/y.

    [USD, CHF]
    EUR-CHF has settled higher, in the mid 1.1600s, after yesterday posting an 11-week low at 1.1581, which was the culmination of what has been the sharpest bout of declines the cross has seen since June last year. The driving dynamic has been a souring sentiment towards the euro on concerns about the policies of the newly forming anti-establishment and Eurosceptic coalition government in Italy. EUR-CHF is down over 3% from the 41-month that was printed a month ago at 1.2005, which was the summit of an 11-month rally phase, and which in turn was a reflection of what had been -- before recently -- a sense of abating existential risks that the Eurozone was facing. Now things look to be trending back in the other direction. This week's breach and daily closes below the 200-day moving average, presently situated at 1.1694, has been for technical analysts a significant bearish signal. Trend resistance is at 1.1722-24.

    [USD, CAD]
    USD-CAD has maintained a choppy, broadly sideways range that's been persisting for a month now. The low over this period has been 1.2729 and the high 1.2997. General U.S. dollar firmness has been met by Loonie-supportive higher oil prices, which has been causing volatility in USD-CAD but little net directional bias. We expect more of the same for now.

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