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By XE Market Analysis October 13, 2017 3:28 am
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    XE Market Analysis: Europe - Oct 13, 2017

    The dollar has retained a soft tone, settling in the lower 112s versus the yen, near the week's low at 111.99 (which was seen on Tuesday), edging near nine-day lows versus sterling and logging a new nine-day low in the case against the Australian dollar, and drifting back some against the euro. EUR-USD lifted to the 118.50 area on a Bloomberg report that the ECB is considering halving asset purchases next year but with a longer than hitherto expected nine-month extension to the program. Attention today will be on U.S. CPI data, as benign data would fit concerns among some Fed policymakers that low inflation is not a transitory phenomenon. We expect U.S. headline CPI to lift to 0.6% m/m (median same) from 0.4% m/m, driven by the rise in petroleum prices, but see core CPI remaining at a benign 0.2% m/m. Sterling and Brexit issues will remain at the fore. Talk of a no-deal exit from the EU has been increasing, with five rounds of negotiation (the fifth having concluded yesterday) having reached "deadlock," according to the EU's chief Brexit negotiator, Barniar. He also said that the EU would agree to a two-year transitory period, to buy more time after actual Brexit occurs in March 2019.

    [EUR, USD]
    EUR-USD lifted to the 118.50 area on a Bloomberg report that the ECB is considering halving asset purchases next year, although with a longer than hitherto expected nine-month extension to the program, which will likely have an offsetting influence on forex markets. Attention today will be on U.S. CPI data, as benign data would fit concerns among some Fed policymakers that low inflation is not a transitory phenomenon. We expect U.S. headline CPI to lift to 0.6% m/m (median same) from 0.4% m/m, driven by the rise in petroleum prices, but see core CPI remaining at a benign 0.2% m/m. Other U.S. data, particularly retail sales, is likely to come in on the strong side. Overall, EUR-USD remains without a pronounced directional bias, as expect a broader trading band, defined roughly by 1.1500 and 1.2000, will persist.

    [USD, JPY]
    USD-JPY has settled in the lower 112.00s, just above the week's low at 111.99 (which was seen on Tuesday), and above the 200-day moving average, which is below here. Stock markets in Asia have been mixed today, while China export data disappointed, which along with a strong rise in imports, drove China's trade surplus down to a six-month low. This, along with concerns that North Korea is readying itself for another missile test, have kept end-of-week trading cautious -- a backdrop that typically gives the yen an underpinning. EUR-JPY, AUD-JPY, among other yen crosses, have traded softer today, similar to USD-JPY. We expect more of the same. Some focus will be on U.S. CPI data, as benign data would fit concerns among some Fed policymakers that low inflation is not a transitory phenomenon. USD-JPY support is at 111.88 and 111.99.

    [GBP, USD]
    The pound rallied back after dropping sharply yesterday on Brexit "deadlock", which is the word used by the EU's chief Brexit negotiator Barniar following the conclusion of the fifth round of negotiations between the UK and EU. This follows both UK PM May and Chancellor Hammond having this week implied that a no-deal exit from the EU will be in contingency planning. Barniar subsequently said that the EU would agree to a two-year transitory phase, which will buy crucial time following actual Brexit in March 2019. News of delays or troubles in Brexit negotiations tends to be a trigger for markets to sell sterling.

    [USD, CHF]
    USD-CAD has found a footing after yesterday posting a new correction low of 1.2432, which extended the pullback from last Friday's six-week peak at 1.2600. The move was driven by broader softness in the U.S. dollar, which was a feature since the open of trading on Monday, given fresh legs by Wednesday's release of the FOMC minutes from the September meeting, which weakened the conviction of market expectations for a December rate hike. The Canadian dollar, meanwhile, is likely to remain on a neutral-to-softer bias, in place since BoC Governor Poloz unexpectedly threw cold water on market expectations for further rate hikes in saying that the central bank was not on a predetermined path.

    [USD, CAD]
    EUR-CHF is down today after five straight sessions of gains, which yesterday left an 18-day high at 1.1566. The franc has also been seeing weakness against the dollar and yen, among other currencies. An abatement in the standoff between Catalan would-be secessionists with Madrid as a worry-point for markets has elicited franc selling, which since July has been tending to trade softer on any signs that suggests risks to the political integrity of the Eurozone are abating. Former EUR-CHF resistance at 1.1488-90 and 1.1500 now revert as supports. We have been anticipating an eventual return to 1.2000, which is the former trading floor of the SNB's.

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