XE Market Analysis: Europe - Jul 10, 2019

The USD majors mostly settled to a consolidation as market participants went into bets-off mode ahead of the Congressional testimony of Fed Chairman Powell later today. The narrow trade-weighted USD index (DXY) was showing little change heading into the London interbank open, at 97.50. EUR-USD concurrently settled in a less-than-10-pip range just above the 1.1200 mark, above yesterday's three-week low at 1.1193. USD-JPY edged out a new six-week high, at 108.99, concomitantly with intraday gains on Asia stock markets, before they turned modestly negative, which took the breeze out of the sails of Yen sellers. The pair's range in Tokyo remained less than 20 pips. Elsewhere, the NZD took a sharp hit before rebounding, leaving a three-week low against the USD at 0.6568. There was no apparent news or data catalyst. AUD-USD whittled out a three-week low at 0.6918, too, aided lower by weak consumer sentiment data out of Australia. On the news front, there was reports that President Trump is taking a soft stance with regard to Beijing's handling of the Hong Kong protests in attempt to maintain relations for trade talks, while telephone negotiations on trade were reported to have been productive. As for Fed Powell's testimony today, the prepared text released last Friday didn't give anything away, reiterating that the economy and job market remained strong, while inflation was low. Fed funds futures are discounting about 97% odds for a 25 bp at the late July FOMC, have price out a 50 bp move in light of the strong June jobs report. Key will be to what extent the Fed chief validates these expectations.

[EUR, USD]
EUR-USD settled in a less-than-10-pip range just above the 1.1200 mark, above yesterday's three-week low at 1.1193. Markets are anticipating Fed Powell's testimony later today. The prepared text released last Friday didn't give anything away, reiterating that the economy and job market remained strong, while inflation was low. Fed funds futures are discounting about 97% odds for a 25 bp at the late July FOMC, have price out a 50 bp move in light of the strong June jobs report. Key will be to what extent the Fed chief validates these expectations. Aside from the flow and then ebb in Fed rate cut expectations, in the Euro's case market narratives have been centering on weak data and the dovish credentials of ECB boss designate, Lagarde, which last week tipped Bund yield curve into negative right out to the 20-year maturity while the 10-year yield flirted with -0.400%. EUR-USD has support at 1.1181-83, and resistance at 1.1226-29.

[USD, JPY]
USD-JPY edged out a new six-week high, at 108.99, concomitantly with intraday gains on Asia stock markets, before they turned modestly negative, which took the breeze out of the sails of Yen sellers. The pair's range in Tokyo remained less than 20 pips. While USD-JPY declined in eight of the last 12 weeks, the last two have been up weeks and this week looks, so far, to made it a third. Support comes in at 108.45-48.

[GBP, USD]
EUR-GBP has forayed above 0.9000 for the first time since early January while Cable descended into 27-month low territory. A 1.6% y/y contraction in the BRC retail sales figure for June yesterday, which thwarted the consensus forecast for a 0.8% rise, is the latest in a series of underwhelming data out of the UK, providing fresh fuel for the pronounced declining motion the UK currency has been seeing since early May. EUR-GBP has now made this the eighth week out of the last nine where a new higher high has been set. The Pound has been trading with a 10-15% trade-weighted Brexit discount since the vote to leave the EU in June 2016, and we don't see much scope for this to reverse anytime soon. Last week's June composite PMI fall sharply to 49.2 from May's 50.7, signalling economic contraction and highlighting the impact of prolonged Brexit uncertainty and slowing growth momentum in continental Europe. As for Brexit, the news flow has remained quiet in terms of substantive developments. That will change as soon as the new prime minister, most likely to be the no-deal-Brexit-if-necessary Boris Johnson, takes up the reigns (on July 23). The UK releases industrial production tomorrow, which has us expecting some rebound-from-weakness, with output seen lifting 1.5% m/m after April sharp 2.7% contraction.

[USD, CHF]
EUR-CHF has put in a couple of weeks of steady, range-bound trading after dropping sharply in mid June as markets adjusted to increased prospects for the ECB to return to the dovish policy tap. The cross printed a two-year low at 1.1057 before recouping to levels around 1.1100. The advance of the Franc against the Euro will be displeasing to the SNB (the EUR-CHF cross being a good proxy on the Swiss currency's trade weighted value). The SNB restated at its quarterly policy review last month that downside risks to the economy have increased, and that the overall policy setting "remains as expansionary as before." The central bank also nudged its inflation forecast lower, now expecting CPI to average just 0.6% y/y this year, 0.7% in 2020, and 1.1% y/y in 2021. With the ECB increasingly under pressure to ease policy again, the SNB remains eager to counter Franc appreciation, especially against the Euro. Assuming the ECB remains on the path of further monetary policy easing, we would expect EUR-CHF retain a declining bias. The SNB's -0.75% deposit rate and threat of tactical intervention hasn't been sufficient to arrest recent appreciation of the Franc.

[USD, CAD]
USD-CAD has settled around the 1.3130-35 mark after putting in two consecutive days of gains, which yesterday left a nine-day high at 1.3141. This extends the recovery from last Friday. Bigger picture, the pair has been in a distinct bear trend since late May, declining in four of the last five weeks. Trend resistance comes in at 1.3091-94.