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By XE Market Analysis July 31, 2019 7:34 am
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    XE Market Analysis: North America - Jul 31, 2019

    Narrow ranges have been prevailing into the Fed's policy announcement later. EUR-USD settled lower, back under 1.1150, after earlier edging out a four-session high at 1.1162. The 25-month low seen last week at 1.1101 remains in scope. USD-JPY continued to ply a relatively narrow range in the mid 108.00s, while Sterling has settled above yesterday's major-trend lows, although with little sign of even a half decent dead-cat bounce as markets weigh higher odds for a no-deal Brexit scenario under the new UK prime minister, Boris "I'm serious about a no-deal" Johnson. USD-CAD edged out a four-session low at 1.3134, making today the third straight day a lower low has been seen, extending the mild correction seen from the one-month high seen last Friday at 1.3198. The focus today is fully on the Fed. A 25bp rate cut is fully factored, so focus will be on the central bank's forward guidance. Given recent data we see potential for markets to be disappointed. We expect Chairman Powell to leave the door open for additional easing, but could disappoint expectations for a string of easings into 2020.

    [EUR, USD]
    EUR-USD has settled lower, back under 1.1150, after earlier eking out a four-session high at 1.1162. The 25-month low seen last week at 1.1101 remains in scope. The focus today is fully on the Fed. A 25bp rate cut is fully factored, so focus will be on the central bank's forward guidance. Given recent data, and given recent remarks by some of the more dovish members at the Fed, we see potential for markets to be disappointed, having, we think, overly priced in an aggressive easing path. We expect Chairman Powell to leave the door open for additional easing, but he won't likely satisfy expectations for a string of easings into 2020. If we're right, the dollar could be in for a up phase, which in turn would pressure EUR-USD. The pair has resistance at 1.1157-62, and support at 1.1095.

    [USD, JPY]
    USD-JPY has continued to ply a relatively narrow range in the mid 108.00s, in part reflecting a hunkering down of markets ahead of the Fed policy announcement later on Wednesday. A 25bp cut is fully factored, so focus will be on the central bank's forward guidance. Given recent data, and given recent remarks by some of the more dovish members at the Fed, we see potential for markets to be disappointed, having, we think, overly priced in an aggressive easing path. Chairman Powell will leave the door open for additional easing, but won't likely satisfy expectations for a string of easings into 2020. If we're right, USD-JPY has scope to rally, near-term. Support comes in at 108.40-42.

    [GBP, USD]
    Sterling has settled above yesterday's major-trend lows, but with little sign of even a half decent dead-cat bounce as markets weigh higher odds for a no-deal Brexit scenario under the new UK prime minister, Boris "I'm serious about a no-deal" Johnson. Cable printed a fresh 28-month low at 1.2119, and EUR-GBP a 22-month high at 0.9190. There is potential for a sharp short-squeeze positioning rebound, given the large net short exposure to the pound, but there seems little scope for a sustained recovery while the new UK prime minister remains steadfast in his rejection of the Irish backstop, and given his threat to leave, deal-less, the EU free trade area (and the EU's 40 trade agreements with 70 countries), and while Brussels remains steadfast in its conviction that there can be no deal without the Irish backstop. One reason to be not-too-bearish on the pound is that, as it stands, Johnson is in a weak position as Parliament has the numbers to stop a no-deal scenario from happening (the government's working majority is set to fall to one from two following a by-election tomorrow). Boris has been saying that there won't be a general election, but he might have no choice to risk it if wants to strengthen his hand (two thirds of Parliament would have to vote for a new election, but is unlikely to be an obstacle), as Brussels is unlikely to feel too pressured by his bluster of a no-deal Brexit.

    [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 edged out a four-session low at 1.3134, making today the third straight day a lower low has been seen, with the pairing correcting some after posting a one-month high seen last Friday at 1.3198. The turn lower reflects position re-jigging into the Fed's policy announcement. Given our expectation for the Fed to disappoint the easing path priced into Fed funds futures, although leaving the door open to further easing, we take bullish near-term view of USD-CAD. Support comes in at 1.3115-17.

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