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By XE Market Analysis July 19, 2018 7:22 am
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    XE Market Analysis: North America - Jul 19, 2018

    The Dollar rose for at third consecutive day, tracking a rise in U.S. Treasury yields. The USD index (DXY) lifted by nearly 0.5% in making a fresh three-week high at 95.50. EUR-USD printed a 17-day low at 1.1595, and Cable clocked a 10-month low of 1.2985, aided by weak retail sales data out of the UK (even though there were one-off factors at play). USD-JPY climbed back above 113.00 but remained shy of yesterday's four-month peak at 113.13. The U.S. currency also posted gains against the Dollar bloc units and most emerging market currencies. Expectations for U.S. GDP to more than double Q1's growth rate by rising to a 4.1% y/y clip in Q2 (the advance report of which is due next Friday) have been underpinning, being brought into focus by the upbeat prognosis of Fed Chairman Powell during his testimonies before the Senate and House this week. A concurrent theme has been refreshed concerns about trade protectionism, which has cast a dampener on base metal prices, along with Asian and European stock markets, and U.S. equity index futures. Brexit remains prominent with officials on both sides of the channel proposing stepped up contingency planning for a no-deal Brexit outcome (whereby the UK leaves the EU without establishing new trading and other arrangements).

    [EUR, USD]
    EUR-USD printed a 17-day low at 1.1595, extending declines into a third consecutive day. We remain bearish of the pairing, based on the prognosis for strong U.S. economic growth and the Fed's tightening course, while any move from Trump to follow-through on hits threats to tariff car imports would likely be negative for the Euro relative to the Dollar. EUR-USD has resistance at 1.1660-62 while the July-2 low at 1.1591 provides a downside waypoint.

    [USD, JPY]
    USD-JPY has been making time in the upper 112.00s after yesterday capping out at 113.13, which is the loftiest level the pairing has seen since January. Buoyant global stock markets, where upbeat Q2 corporate earnings, and expectations for more, have offset concerns about trade protectionism for now, which has allowed the Yen's safe haven premium to unwind some and for markets to focus on bullish fundamentals (i.e. contrasting policy paths of the Fed and BoJ). A report from last Friday that the Japanese central bank will likely cut its long-term inflation projections, according to unnamed sources cited by Reuters, has continued to resonate. The sources suggested that the BoJ will concede that CPI will likely remain below the 2% target for as long as three more years, and highlight structural factors that are capping inflation. The central bank meets on policy on July 30-31, when a quarterly revision of inflation and growth forecasts will also be published. USD-JPY has resistance at 113.38-40.

    [GBP, USD]
    Cable has recouped most of the losses seen after UK data, where retail sales unexpectedly contracted by 0.5% m/m. The pairing printed a 1.2982 low, which is the lowest level seen since last September, and extending the present run lower into a third consecutive day. The Pound has since recouped back above 1.3000, although has remained about 10 pips below pre-release levels at 1.3018-20. There is a qualification behind the dip in retail sales, as the ONS stats office has stressed, in that hot weather and the national fixation on the World Cup combined to lower both footfall in non-food stores and online purchases, which more than offset strong food store sales. The underlying trend also remains strong, with retail sales rising 2.1% q/q in the three months to June, which is the largest increase since the three months to February 2015, with growth seen across all the main sectors. The data maintains our call for the BoE to hike the repo rate by 25 bp on August 2, although this is admittedly now a less-than-full-conviction view following the unexpected dip in UK core CPI to 1.9% y/y from 2.1%. Brexit remains in sharp focus given the fragility of both the prime minister and the government, with ideologically-driven Brexiteers MPs threatening disruption. We continue to see directional risks to Cable as being greater to the downside than to the upside.

    [USD, CHF]
    EUR-CHF has settled in the lower 1.1600s, down from the eight-week high seen earlier in the week at 1.1714. SNB's Maechler said late last month that the Franc "remains highly valued" despite the depreciation seen over the last year, arguing that "we are in extraordinary times and we are using unconventional measures." The commáents affirm that the SNB is firmly on hold, with Maechler admitting that the SNB's monetary policy room for manoeuvre is "necessarily" affected by the actions of ECB and Fed.

    [USD, CAD]
    USD-CAD turned back below 1.3200 after peaking yesterday at 1.3259, which is a three-week peak. Fed chair Powell's upbeat view of the U.S. economy, along with recent hefty declines in oil prices, formed a cocktail of bullish narratives for USD-CAD. We retain a bullish view of the pairing, looking for a revisit of the June highs at 1.3384-87. Support comes in at 1.3146-68.

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