XE Market Analysis: Europe - Jun 25, 2021

The dollar is softer in overall narrow ranges. EUR-USD has ticked back into the mid 1.1900s, and USD-JPY has drifted off yesterday's 15-month high at 111.12. The pound has settled after rotating lower on the back of the BoE's cautious messaging yesterday following its June policy review. Cable has edged back above 1.3900, above yesterday's three-day low at 1.3889, while the pound fractionally extended yesterday's low versus the euro. AUD-USD edged out a two-day high at 0.7599 while the U.S. dollar retraced some of the gain seen yesterday versus the Canadian dollar. Most of yesterday's U.S. data, which included durables, jobless claims, Q1 GDP, and advance trade, undershot expectations, which seems to have taken any laggard upside impetus out of the dollar. The European calendar is quiet today, while the U.S. schedule brings May personal income and consumption, with the former seen falling 2.8% from the 13.1% drop in April, and the latter expected to rise 0.6% from the prior 0.5% increase. Attention will be on the price components with the headline PCE price deflator expected to rise 0.6%, as it did in April. The core rate is projected rising 0.6% versus the 0.7% uptick previously. However, the FOMC has managed to both announce that it is thinking about talking about tapering while assuaging the markets of inflation fears, so the data is likely to be taken in stride.

[EUR, USD]
EUR-USD has ticked back into the mid 1.1900s, reversing a portion of yesterday's ebb and leaving the pair in an overall consolidation of the 1.5%-plus decline seen following the Fed's subtle 'hawkish tilt' policy announcement. The Fed's guidance last week only marked a small step, with 11 of the 18 forecasting two quarter-point hikes in the Fed funds rate by the end of 2023 -- well over two years out. As we have been seeing this week, dovish members, including Chairman Powell, have to an extent this week been walking back the messaging by emphasizing that an actual policy tapering remains a distant prospect while pointing to the slack in the labour markets and temporary supply bottlenecks. Regarding the ECB, there have been increasing cracks at the governing council between the dovish and hawkish members. The phrasing of the ECB's recent June statement allowed for a slight scaling back of monthly purchase volumes over the summer months, and come September that is likely to be confirmed. The U.S. calendar today brings May personal income and consumption, with the former seen falling 2.8% from the 13.1% drop in April, and the latter expected to rise 0.6% from the prior 0.5% increase. Attention will be on the price components with the headline PCE price deflator expected to rise 0.6%, as it did in April. The core rate is projected rising 0.6% versus the 0.7% uptick previously. However, with the FOMC having managed to both announce that it is thinking about talking about tapering while simultaneously assuaging the markets of inflation fears, the data is likely to be taken in stride.

[USD, JPY]
USD-JPY has drifted off yesterday's 15-month high at 111.12. The shift higher in U.S. versus Japan yield differentials has been a supportive factor for the pairing in the wake of the Fed's step, albeit baby step, towards the hawkish side last week. Buoyancy in global stock markets has been another factor, which has contributed to yen underperformance. We remain bullish on USD-JPY. The Fed's subtle policy shift doesn't in itself warrant a sustained correction in global equity markets, which have been focusing on growth potential. The yen is a low yielding currency of a surplus economy, and tends to weaken during risk-on phases in global markets, and strengthen during times of pronounced and sustained risk aversion. It should be of no surprise that the yen has been the weakest performing of the G10+ currencies during the reflation trade. The Japanese currency, for instance, is registering a loss of over 40% against the Australian dollar from levels seen at the height of pandemic panic in global markets, in March 2020.

[GBP, USD]
The pound has settled after rotating lower on the back of the BoE's cautious messaging yesterday following its June policy review. Cable has edged back above 1.3900, above yesterday's three-day low at 1.3889, while the pound fractionally extended yesterday's low versus the euro. The BoE Monetary Policy Committee's statement yesterday showed policymakers are particularly focused on the labour and to what extent and how quickly furloughed works will be re-employed once the government's pandemic wage-support scheme ends at the end of September. MPC member Vlieghe had already said, weeks ago, that while an "early" rate hike was possible, this depended on there being a smooth transition out of the furlough. The BoE also repeated that it expects inflationary pressures to be transitory, and that risks of second-round inflationary effects are limited as inflation expectations remain "well anchored." We don't expect yesterday's downward shift in the pound will mark the beginning of a bear phase. Markets will focus on incoming data, which are likely to affirm a robust expanding economy, even though the government delayed the full reopening of the economy by a month, to July 19. New Covid cases have risen quite sharply over the last several weeks, but the link between infection and hospitalisation/mortality has cleared by smashed thanks to the high level of vaccinations in the UK.

[USD, CHF]
Policymakers at the SNB retain a chronic disquietude about the franc's value. Unlike most central banks, the SNB explicitly incorporates the franc into monetary policy to ward off speculative purchases of the currency, which would impart deflationary forces (via cheaper imports) with the consequential impact of an unwelcome tightening in real interest rates. The central bank repeated at its latest quarterly monetary policy review that the franc remains "highly valued" and said it is ready to intervene directly in the foreign exchange market.

[USD, CAD]
USD-CAD found a footing after dropping sharply from Monday's peak at 1.2487 to Wednesday's low at 1.2250. The Fed's guidance shift last week created a U.S. dollar favourable shift in yield differentials, and wrong-footed a market bullish on the Canadian dollar. But the recent strong ascent in oil prices, which this week hit a fresh 32-month high on the WTI benchmark, at $74.25, has enticed demand back to the oil correlating currencies, such as the Canadian dollar. The prevailing sub-capacity OPEC production alongside rising demand and ongoing fiscal and monetary policy largesse in major economies has given oil prices a strong underpinning, although upside momentum has abated over the last couple of days amid signs that major producers will slacken their self-imposed supply restrictions in August.