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By XE Market Analysis May 31, 2018 3:25 am
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    XE Market Analysis: Europe - May 31, 2018

    The dollar has traded mixed-to-softer so far today, weakening most notably against the euro, which has managed something of a rebound after yesterday's selloff. EUR-USD has recouped above 1.1550, putting in a little space from the 10-month low of yesterday, at 1.1510. The dollar has also given back some of the recent gains seen against the Australian dollar and other dollar bloc currencies. USD-JPY, meanwhile, has lifted to the upper 108.00s as the yen softened following safe-haven driven outperformance, which left a one-month low at 108.11 in the late New York PM session yesterday. We expect the euro to come back under pressure, and the yen to rebound from current weakness, however, given the turmoil in Italian politics, which is posing an existential threat to the Eurozone, and as the trade spate between the U.S. and China boils up again.

    [EUR, USD]
    EUR-USD has posted a fresh rebound high of 1.1688, which is the loftiest level seen since Monday. This extends the lift from the 10-month low that was seen at 1.1510 on Tuesday. Most euro crosses have also gained over this period, which has been concomitant with a steadying in Italian asset markets as the two main populist parties make a last-ditch attempt to form a government that would be satisfactory to President Mattarella (who had rejected proposals for a Eurosceptic finance minister) and avoid the need for new elections. Markets will remain on tenterhooks as things develop. Perky inflation data out of Germany and Spain this week have also played a role in giving the euro a prop, though a Washington Post report that President Trump will later today announce tariffs on steel and aluminium imports from the EU, in addition to Canada and Mexico, may curtail the euro's rebound potential. EUR-USD had been looking ripe for a rebound following six consecutive weeks of decline, which is an unusually drawn-out directional phase by the pair's price history norms. Resistance is at 1.1728-1.1733, which encompass highs that were seen over the last week. Support comes in at 1.1608-10.

    [USD, JPY]
    USD-JPY has settled in the mid 108.0s after failing to sustain gains above 109.0 yesterday. Yen crosses are also lower, reflecting a generally firmer yen, albeit moderately so. This is turn reflects a more circumscribed view markets are taking of the situation in Italy, which has returned a bid to the Japanese currency. The Washington Post has also reported, citing three unnamed sources, that President Trump will later today announce tariffs on steel and aluminium on imports from Canada, Mexico and the EU. The month's end has reportedly generated some demand for the Japanese currency, too. In data, Japan's April industrial production disappointed at 0.3% m/m growth. The median forecast had been for 1.4% m/m growth, though the data hasn't had a bearing on forex markets.

    [GBP, USD]
    Cable has recovered above 1.3300, following EUR-USD's rebound and putting in some distance from Tuesday's six-month low at 1.3204. The 14-day RSI, and other momentum indicators, have been flashing "oversold," meaning that the duration and pace of the recent downtrend has become stretched by Cable's price history norms, and therefore ripe for a correction (at least for those who don't fully subscribe to efficient market hypothesis). In data, the May Gfk consumer confidence report showed a fractional improvement in lifting to -7 after -9 in the month prior. April lending data from the BoE are up later, while the May manufacturing PMI survey is due tomorrow, where we anticipate a dip to 53.5 in the headline reading (median 53.6) from the 53.9 reading of April. We expect a 25 bp BoE hike in the repo rate in August, assuming political turmoil in the Eurozone doesn't throw the European economy into a spin.

    [USD, CHF]
    EUR-CHF has recovered above 1.1550, extending the rebound from Tuesday's eight-month low at 1.1368. The move has been concomitant with the steadying in Italian markets as the main populist parties attempt to form a government and avoid the need for a new general election. We remain doubtful as the alliance of the far right League and the left-wing, policy-inconsistent Five Star Movement is a strange one (unified only by a mistrust of Brussels). The recent phase of euro weakness had seen EUR-CHF lose over 4% 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.

    [USD, CAD]
    USD-CAD dove sharply from levels above 1.3000 to a three-day low of 1.2835 yesterday, since settling around the 1.2870 mark. The losses came in the wake of the BoC policy announcement, which left the cash rate at 1.25% while laying the groundwork for a 25 rate hike in July. The BoC stated that "higher interest rates will be warranted over time to keep inflation near target." In April, they tempered that view by adding "some monetary policy accommodation will still be needed to keep inflation on target," which is absent in yesterday's statement, which sparked buying of Canadian dollars. The BoC still assured markets that the central bank will proceed with "a gradual approach to policy adjustments" that is guided by the data, and noted uncertainties about trade, which has been "damping global business investment." The Washington Post has also reported that President Trump will announce tariffs on imports of Canadian steel and aluminium (in addition to Mexican and EU imports). We expect USD-CAD to hold firmer for now. Support is at 1.2860.

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