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By XE Market Analysis July 30, 2019 7:32 am
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    XE Market Analysis: North America - Jul 30, 2019

    The Dollar has traded mixed, seeing fresh highs against the underperforming Pound, holding steady versus the Euro while losing ground to the Yen, which firmed up after the BoJ left policy settings changed, as expected, while maintaining its existing policy bias, which disappointed some who had been looking for something a more specific. Cable printing a fresh 28-month low at 1.2119, and EUR-GBP to a 22-month high of 0.9190 . Sterling is showing an average decline of over 2% from week-ago levels versus the the Dollar, Euro and Yen, and is showing a near 5% losses in the case against the dollar on the year-to-date. The latest round of losses comes after new UK Prime Minister Boris Johnson said that the existing Withdrawal Agreement with the EU "is dead," setting up a confrontation with Brussels, which has shown no sign waving in the face of Johnson's "we actually mean it" intention to not settle the GBP 39 bln divorcing settlement and leave the EU without a deal. EUR-USD has been plying a narrow rage in the mid 1.1100s, lacking directional into the Fed's much anticipated policy announcement tomorrow. The pairing has been holding above the 25-month low seen last week at 1.1101. USD-JPY drifted to the mid 108.0s from a three-week high that was seen ahead of the data, following disappointing industrial production figures out of Japan, at 108.94. EUR-JPY and other Yen crosses saw a similar fall-from-highs price action.

    [EUR, USD]
    EUR-USD has been plying a narrow rage in the mid 1.1100s, lacking directional into the Fed's much anticipated policy announcement tomorrow. The pairing has been holding above the 25-month low seen last week at 1.1101, which was seen before the ECB policy announcement last Thursday, with its refrain from easing having buoyed the Euro. The big focus this week is on the Fed, with the two-day FOMC gathering concluding Wednesday. With a 25 bp easing fully baked in the cake, the question is how dovish will the Fed's forward guidance will be. While stronger than expected Q2 GDP growth data, released Friday, including solid consumer spending, prompted a curve narrowing trade in Treasuries, the markets are still pricing in very dovish guidance, with about 75 bps in rate cuts projected this year. There could be sore disappointment if the Fed doesn't fully deliver, which is our view. This could, with the ECB gearing up for a rate cut in September, keep the Dollar underpinned, and maintain EUR-USD's downward directional bias. EUR-USD has resistance at 1.1157-60, and support at 1.1095.

    [USD, JPY]
    The Yen has firmed up moderately in the wake of the BoJ policy announcement. Market narratives have mostly taken the view that the central bank was a little less dovish than expected, especially with both the Fed and ECB heading to rate cuts. USD-JPY drifted to near 108.50 from a three-week high that was seen ahead of the data, following disappointing industrial production figures out of Japan, at 108.94. EUR-JPY and other yen crosses saw a similar fall-from-highs price action. The BoJ kept its short-term interest rate target at -0.1% and its pledge to guide 10-year JGB yields around 0% while maintaining its asset buying programme. The central bank signalled its commitment to keep interest rates at current levels "for an extended period of time, at least through around spring 2020," commenting that "the momentum for achieving 2% inflation is sustained, but lacks strength." The forward guidance is pretty much unchanged from existing guidance, which seemed to cause a modicum of disappointment in forex markets, though JGB yields still dipped while the Nikkei closed with a 0.4% gain on the day. BoJ Governor Kuroda followed up at his press conference by saying that he doesn't think there is a need to change the forward guidance, and that the central bank's stance doesn't necessarily mean there will be fresh stimulus soon. Overall, the balance of risks for USD-JPY and EUR-JPY seem to the downside, with both the Fed and ECB having much more room to add monetary stimulus than in the case of the BoJ.

    [GBP, USD]
    Sterling rebounded some after Cable printing a fresh 28-month low at 1.2119, and EUR-GBP to a 22-month high of 0.9190 . Sterling is showing an average decline of over 2% from week-ago levels versus the the Dollar, Euro and Yen, and is showing a near 5% losses in the case against the dollar on the year-to-date. We estimate that the UK currency is now trading with a near 17% discount from levels prevailing ahead of the vote to leave the EU in June 2016. The latest round of losses comes after new UK Prime Minister Boris Johnson said that the existing Withdrawal Agreement with the EU "is dead," setting up a confrontation with Brussels, which has shown no sign waving in the face of Johnson's "we actually mean it" intention to not settle the GBP 39 bln divorcing settlement and leave the EU without a deal.

    [USD, CHF]
    EUR-CHF has settled after rebounding with gusto last week after the ECB refrained from hitting the rate-cut button on Thursday. The cross, which is sensitive to ECB policy, sprang to a recovery high of 1.1063 from a 24-month low at 1.0962. We still anticipate EUR-CHF to remain biased lower as the ECB shifted to an explicit easing bias, laying the groundwork for a comprehensive set of easing measures in September. The risk of a disorderly no-deal Brexit on October 31 is also in the mix, which is a bearish factor for the cross.

    [USD, CAD]
    USD-CAD has settled below the one-month high seen on Friday at 1.3198. This extended the rebound from the nine-month low seen earlier in the month at 1.3016. Diminished expectations for aggressive Fed easing returned some support to the U.S. currency. As for the BoC, the central bank maintained a neutral bias at its June policy meeting, delivering the widely expected no-change in the 1.75% rate setting. Policymakers still emphasized that the trade and geopolitical backdrops are clouding the outlook, and the BoC will "pay particular attention to developments in the energy sector and the impact of trade conflicts on the prospects for Canadian growth and inflation." After posting a lower weekly low for seven consecutive weeks, USD-CAD last week has ascended through trend resistance at 1.3064-66 on route to posting an up week. Given our view that markets are set up for a disappointment in Fed forward guidance this week, having priced in 75 bp worth of rate cuts before year-end, we retain a near-term bullish view of USD-CAD. Support comes in at 1.3148-50.

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