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By XE Market Analysis May 14, 2018 7:03 am
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    XE Market Analysis: North America - May 14, 2018

    The USD index (DXY) has slipped below last week's low on route to making an 11-day nadir at 92.31 in what is now the third straight session of declines and the most sustained down phase the dollar has seen since early April. The move has been concomitant with a softening in the outlook for an aggressive Fed stance later this year and next. Last Thursday's release more benign than expected CPI data fed this theme, which came with the Treasury market downgrading outlooks for a fourth hike this year after slowing in the Q1 economy, and as Fed Chairman Powell and the FOMC statements and minutes showed no major worry that the Fed was falling behind the curve, and indeed revealed a willingness to let inflation rise over the 2% mark. The discounted probability in Fed funds futures for a fourth hike has been knocked back to between 20% to 25%, while implied rates show a 25 bp tightening in June remains fully priced in, with another hike in September likely. We don't expect the current phase of dollar losses to sustain, however. We are expecting this week's slew of U.S. data, including retail sales, producer sentiment, housing starts, industrial production and business inventories, should overall be positive.

    [EUR, USD]
    EUR-USD lifted to an ten-day high of 1.1990, extending a recovery from the four-month low that was seen last week at 1.1822. This is now the most sustained ascent the pair has seen since early April. Softer than expected CPI data out of the U.S. last week has taken the edge out of Fed tightening expectations, in turn weighing on the dollar. The U.S. Treasury yield curve is also the flattest since 2007 and there is a narrative in markets of a potential inversion, a phenomenon that is generally taken as a harbinger of recession (and as highlighted by St Louis Fed's Bullard on Friday). EUR-USD's 14-day RSI momentum indicator had been flashing "oversold" over the last week, suggesting that the pair was ripe for a rebound (based on historical trend characteristics). After tumbling some 4% from mid April through to last week, we see EUR-USD as having entered relatively stable trading range. Support is at 1.1910-12.

    [USD, JPY]
    USD-JPY has chopped around the low to mid 109.0s. The pair posted an intraday high of 109.57 in before taking a near 40-pip tumble to a 109.19 low at the Tokyo fixing (00:50 GMT). There have been no data or developments of note out of Japan today. The uptrend that commenced from sub-105.0 levels looks to have lost thrust. The U.S. yield curve is now the flattest its been since 2007, with long dated yields coming off while short end yields remain elevated, pricing in Fed tightening over the next year. With a lot baked in with regard to expected Fed tightening, and with high oil prices looking to sustain and related geopolitical uncertainties rising in prominence -- U.S. versus Iran relations in particular, but also Venezuela's collapsing oil industry and trade tensions -- there looks to be a growing chance for USD-JPY to correct lower, driven by a retreat in the dollar and/or safe haven demand for the yen.

    [GBP, USD]
    Cable has traded moderately firmer after a firm clos in London on Friday. The pair lifted out of the four-month low that was posted last Thursday at 1.3459. The pound has also made gains versus the yen, which trading more neutrally against the euro and other currencies. Last week's unchanged monetary policy decision fro the BoE, the trimming of GDP and CPI forecasts, and the wary-but-still upbeat tone of MPC members, all met expectations, near enough. It didn't produce a buy-on-the-fact response in the forex market, after a month or so of a declining pound as markets priced out near-term prospects for a BoE hike, but neither did it produce sustained selling. Sterling interest rate futures are now pricing in about 60% odds for a 25 bp rate hike by November, and about 85% odds for a such a move by November. We are gunning for an August move. This week's UK labour market report will be a focus, which we expect to show an unchanged jobless rate of 4.2%, a multi-decade low, and fresh evidence of building wage pressures. Cable has support at 1.3500-02.

    [USD, CHF]
    EUR-CHF edged out a one-week high of 1.1963 and SNB Vice Chairman Zurbruegg told Schweiz am Wochenended that the franc is still "highly valued" nad that the central bank sees "no reason" to give up the negative interest rate or "our willingness to intervene in the foreign exchange market." We expect EUR-CHF to remain broadly underpinned.

    [USD, CAD]
    USD-CAD has found a toehold after posting a three-week low of 1.2719. The disappointing April employment out of Canada, which weakened BoC tightening expectations, has helped give the pair a prop, after declining last week amid the surge in oil prices to four-plus year highs. Resistance is at 1.2807-10.

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