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By XE Market Analysis October 22, 2018 4:00 am
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    XE Market Analysis: Europe - Oct 22, 2018

    The Yen has softened while the Dollar has been mixed in typically narrow early-week ranges. USD-JPY nudged higher, posting a high of 112.71, which is a 12-day peak, while EUR-JPY has edged out a six-day high. This came as the Japanese currency underperformed amid a China-led rebound in stock markets in Asia following a fresh turn of verbal interventions from Chinese officials, with President Xi pledging to support the private sector, including with cuts in personal income tax rates. EUR-USD, meanwhile, has lifted to a three-day high at 1.1535, driven by broader Euro gains. EUR-CHF and EUR-GBP have also lifted, in addition to EUR-JPY, albeit by a moderate extent. Moody's trimmed its rating of Italy's sovereign bond to Baa3, which is the lowest investment grade, but will a stable outlook. The Italian government has also been pledging to put in measures to prevent budget overshoots. Sterling has opened the week on a mixed footing, losing some ground to the Euro while gaining versus the Dollar. The beleaguered UK Prime Minister, May, now looks to in serious jeopardy of a confidence vote, with support among Tory party MPs to oust her gathering place.

    [EUR, USD]
    EUR-USD has lifted to a three-day high at 1.1535, driven by broader Euro gains. EUR-CHF and EUR-GBP have also lifted, in addition to EUR-JPY, albeit by a moderate extent. Moody's trimmed its rating of Italy's sovereign bond to Baa3, which is the lowest investment grade, but will a stable outlook. The Italian government has also been pledging to put in measures to prevent budget overshoots. This has seen some of the Euro's discount unwind, although the jury remains out on the credibility of the Italy's eurosceptic coalition government. EUR-USD has support at 1.1480, and resistance at 1.1572-75.

    [USD, JPY]
    USD-JPY nudged higher, posting a high of 112.71, which is a 12-day peak, while EUR-JPY has edged out a six-day high. This came as the Japanese currency underperformed amid a China-led rebound in stock markets in Asia following a fresh turn of verbal interventions from Chinese officials, with President Xi pledging to support the private sector, including with cuts in personal income tax rates. Fundamentals (yield differentials and the associated contrast between Fed and BoJ policy paths) remain supportive for USD-JPY, but the periodic spectre of risk aversion has been an intermittent offsetting bearish force. USD-JPY has resistance is at 113.07-10.

    [GBP, USD]
    Sterling has opened the week on a mixed footing, losing some ground to the Euro while gaining versus the Dollar. The beleaguered UK Prime Minister, May, now looks to in serious jeopardy of a confidence vote, with support among Tory party MPs to oust her gathering place. Cable has settled around the 1.3080-90 mark. The pound last week declined by an average 1.4% versus the dollar, euro and yen, reflecting an increased Brexit-risk discount after the week's Brussels summit, once heralded as a make-or-break threshold, came and went in without any sign of a breakthrough on the seemingly insoluble Irish border problem. The EU's chief Brexit negotiator Barnier admitted that the Irish border problem could sink Brexit talks.

    [USD, CHF]
    EUR-CHF has lifted above 1.1500 for the first time since early August. The move has tracked a broader gain in the Euro, seen after Moody's retain a stable outlook on its as-expected ratings downgrade of Italian sovereign debt, and with the Italian government pledging to put in measures to prevent budget overshoots. EUR-CHF has support at 1.1445.

    [USD, CAD]
    USD-CAD has settled below 1.3100 after rallying on Friday to a six-week high of 1.3132 following the cooler Canada CPI numbers, and a weak retail sales outcome. Despite the softer data, we still expect the BoC to hike rates this week. The announcement, Monetary Policy Report and press conference are due Wednesday. The BoC is expected to announce a 25 bp rise in rates to 1.75% as the economy runs near potential and underlying inflation holds around the 2% target. We have pencilled in three to four more 25 bp rate hikes next year. The realization of our October projection would leave three 25 basis point rate hikes in 2018 (we expect no change at the December announcement) after the two 25 basis point increases in 2017. A 25 basis point move once a quarter during 2019 still qualifies as gradual in our view, but would be a sign of a bank that is growing increasingly confident in its outlook for the growth and inflation path. USD-CAD has resistance at 1.3132-35.

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