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By XE Market Analysis September 21, 2017 3:46 am
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    XE Market Analysis: Europe - Sep 21, 2017

    The dollar has opened in London about 1% higher following the Fed's announcement yesterday, which confirmed the start of a QT program, as had been widely anticipated, but showed via the dot plot that another rate hike is in the works before year-end followed by another three hikes in 2018. The BoJ subsequently announced unchanged policy, recommitting to ultra-accommodative policy settings, while a new board member argued that further easing may be necessary. USD-JPY logged a four-month high at 112.64, well up from levels near 111.30 seen before the Fed's announcement, and subsequently settled around 112.50. EUR-USD dove from around 1.2010 to a one-week low of 1.1861 before steadying. The narrow traded-weighted USD index clocked a one-week high of 92.49. The gains were concomitant with higher Treasury yields as markets re-price Fed policy expectations. We expect the dollar will remain broadly underpinned for the period ahead.

    [EUR, USD]
    EUR-USD dove from levels just above 1.2000 to a low of 1.1861 in the wake of the Fed's policy announcement yesterday, where it commenced the expected start of balance sheet normalization (quantitative tightening) but signalled via the dot ploy that policymakers are planning on making another four 25 bp rate hikes -- one before year-end and the other three in 2018. This came with markets having already largely discounted an expected shift in ECB policy, and EUR-USD duly dropped. We expect the dollar's bid will have some lets, and EUR-USD, after rallying strongly since April, from levels near 1.0500, now looks set for a relatively sustained corrective phase. A one-third correction would return EUR-USD to near 1.1600, which is a target framework that seems reasonable at this juncture. Resistance is at 1.1968-70.

    [USD, JPY]
    USD-JPY logged a four-month high at 112.64, well up from levels near 111.30 seen before the Fed's announcement, and subsequently settled around 112.50. The Fed announced the start of a QT program, as had been widely anticipated, but showed via the dot plot that another rate hike is in the works before year-end followed by another three hikes in 2018. The BoJ subsequently, and in some contrast of tone, announced unchanged policy, recommitting to ultra-accommodative policy settings while a new board member argued that further easing may be necessary. We expect further USD-JPY upside. Support comes in at 111.99-112.00, while the July peak at 114.49 provides a target. This risk to a bullish view would, of course, be the appearance of a risk-off theme, as such phases tend to drive USD-JPY lower. North Korea's march to nuclear ICBM is the main threat to the apple-cart on this front, and we advise watching developments closely.

    [GBP, USD]
    The pound has lost ground to the outperforming, post-Fed announcement, dollar, but has managed to still make gains versus the euro and yen. Yesterday's solid official retail sales data for August, which rose by 1.0% m/m, smashing expectations for a 0.2% m/m expansion, has given sterling a fundamental underpinning, helping cement market expectations for the BoE to reverse last August's post-Brexit vote 25 bp rate cut at the November MPC meeting. We advise sterling bulls to avoid Cable, as we expect the dollar to remain bid, and, at least over the nearer term, focus on EUR-GBP or GBP-JPY.

    [USD, CHF]
    EUR-CHF has remained buoyant, clocking a new 32-month high for the second time in three days, this time at 1.1581. A an ebb in geopolitical tensions along with last week's SNB 's post-policy meeting guidance, where the central bank, while admitting that exchange rate overvaluation is now less acute, stated that it would remain willing to "intervene in FX markets as necessary" which is "essential in order to reduce the attractiveness of the Swiss franc investment and thus ease pressure on the currency." The SNB said that the currency "remains highly valued," even in light of the relatively sharp weakening the currency saw from late July. We look for EUR-CHF to make an eventual return to the SNB's former floor level, at 1.2000.

    [USD, CAD]
    USD-CAD bolted to a two-week high of 1.2391 in the wake of the Fed's hawkish guidance, which has helped readdress the recent imbalance between the respective Fed and BoC outlooks. We expect the pair to hold up for this reason now. This comes amid signs that the four-month bear phase in USD-CAD, during which time the U.S. buck lost 12% to the Canadian dollar, was starting to wane. Last week was the first up week in last five weeks, while momentum indicators were showing that the bear trend had been starting to look overstretched. The early-September high at 1.2415 provides an initial target ahead of 1.2500. Support is at 1.2283-85. Incoming Canadian data include wholesale sales report for July, due today, which we seen falling by 1.0% m/m. Tomorrow brings August CPI, which we see at 1.6% after 1.2% in July, and retail sales are expected to grow 0.3% in July.

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