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By XE Market Analysis March 21, 2018 7:28 am
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    XE Market Analysis: North America - Mar 21, 2018

    The dollar has traded softer into the Fed's policy announcement. Cable led the way, with the pair gaining about 0.5% following an unexpected dip in the UK unemployment rate and better-than-forecast rise in average household incomes. The pair logged a two-day high at 1.4075. EUR-USD, meanwhile, lifted to the upper 1.2200s, putting in some distance form yesterday's three-week low at 1.2239, a low that capped a recent down move driven by a widening in the U.S. Treasury over Bund yield spread. USD-JPY settled to a consolidation with a modest downward drift after a two-day run higher. The pair drifted to around 106.30 after yesterday printing a one-week high at 106.60. Japanese markets were closed today for a public holiday in Japan, exacerbating thin market conditions with many market participants sitting on their hands into the Fed. USD-CAD dipped to a four-session low of 1.3010 on news of progress on the NAFTA front, with the U.S. dropping its contentious auto-content proposal.

    [EUR, USD]
    EUR-USD has lifted to the upper 1.2200s after logging a three-week low yesterday at 1.2239, which capped a recent down move driven by a widening in the U.S. Treasury over Bund yield spread. The principal focus today is on the Fed policy announcement and SEP (Summary of Economic Projections) today. We are with the market median expectation in forecasting a 25 bp rate hike, to boost the funds band to 1.50% to 1.75%. We also expect the Committee to leave the dot plot medians at 3 hikes this year and next, though policymakers are likely to upgrade their forecasts on growth and lower their view on the unemployment rate. This could keep EUR-USD a sell-into-strength trade. Resistance is at 1.2319-20.

    [USD, JPY]
    USD-JPY has settled to a consolidation with a modest downward drift after a two-day run higher. The pair drifted back under 106.50 after yesterday printing a one-week high at 106.60. Japanese markets were closed today for a public holiday in Japan, so conditions have been on the thin, especially with many market participants sitting on their hands into the Fed policy announcement and SEP (Summary of Economic Projections) today. We are with the market median expectation in forecasting a 25 bp rate hike, to boost the funds band to 1.50% to 1.75%. We also expect the Committee to leave the dot plot medians at 3 hikes this year and next, though policymakers are likely to upgrade their forecasts on growth and lower their view on the unemployment rate. In the event, this would likely give USD-JPY a boost, as a refrain from shifting to a 4 rate hike in 2018 dot plot median would likely be tonic. Anything more hawkish would likely spook global equity markets, which in the event would likely see USD-JPY trade lower, with the yen apt to outperform in such scenarios. USD-JPY has support at 106.00-03.

    [GBP, USD]
    Cable gained about 0.5% following an unexpected dip in the UK unemployment rate and better-than-forecast rise in average household incomes. The pair logged a two-day high at 1.4075. UK labour data showed an unexpected lift in average earnings, which rose 2.8% y/y in the three months to January, up from 2.7% y/y in the month prior (itself revised upwards from 2.5%). The median forecast had been for a 2.6% outcome, and with CPI having ebbed to 2.7% it shows the real pay erosion of the last year has finally abated. The unemployment rate also unexpected dipped back to 4.3%, which is a 40-year-plys low, from 4.4%. The data has fed market expectations for a BoE hike by May, or if more certainly by August.

    [USD, CHF]
    EUR-CHF settled back to the lower 1.1700s after breaking to a two-month high of 1.1749. The high was seen on Tuesday following a media report that the ECB is shifting its focus to the rate path, which gave the euro a broad bid. The SNB last week announced unchanged policy following its quarterly policy review, as had been widely anticipated, while reaffirming its commitment to monetary stimulus to keep what it still considers a richly-valued currency on a back foot. EUR-CHF rallied some 10% from mid last year, has been emblematic of the euro's recovery over the last year, with the franc unwinding latent safe haven premium as existential uncertainties under the Eurozone and EU come off the boil. Even though Eurosceptic parties won about 50% of the vote in Italy's recent general election, the governing political alliance led by La Lega has indicated that Italy will remain in the EU and retain the euro.

    [USD, CAD]
    USD-CAD declined for a third consecutive session, logging a four-session low at 1.3010. The move reflected gains in the Canadian dollar on news of progress on the NAFTA front, with the U.S. dropping its contentious auto-content proposal. Former consolidation support at 1.3045-47 has now reverted as a resistance level. A $3-plus rebound in oil prices this week has also been a positive lead for the Loonie. Next data of note out of Canada will be January retail sales (Friday), seen rebounding 1.0% in January after the 0.8% drop in December, along with February CPI (also Friday), which we expect to rise 0.3% m/m and by 1.8% y/y.

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