XE Market Analysis: Europe - Jun 18, 2021

The dollar has settled to a consolidation of its post-Fed announcement gains. The narrow trade-weighted DXY dollar index is up 1.6% on the week and is currently plying a narrow range just below the two-month high that was printed yesterday at 92.01. EUR-USD has settled just above Thursday's two-month low at 1.1891, and USD-JPY has ebbed to a two-day low at 109.97, having dropped back from the 11-week high that was seen yesterday at 110.82. The yen has posted gains versus other currencies, finding some safe-haven support as global asset markets sputter. The CAD-JPY cross, for instance, which had been a popular long during the reflation trade, has dropped to a six-week low at 88.86. AUD-JPY and NZD-JPY have also come under notable pressure, printing respective three- and one-month lows earlier. The BoJ maintained its monetary policy settings following the conclusion of its two-day review, as had been widely anticipated. The central bank also extended its pandemic funding relief program by six months, as was predicted by the Nikkei newspaper earlier in the week. This didn't impact the yen. We expect the prevailing bias of both the dollar and yen to remain to the upside for now. While longer-dated Treasury yields have whipsawed in the wake of the FOMC, spiking sharply on Wednesday's announcement before tumbling with equal pace and magnitude yesterday, and then stabilizing, the Fed sensitive 2-year note yield has continued to inch higher. The Fed remains some way from actually tightening policy, but its subtle hawkish tilt nonetheless marks a potential inflection point -- the point at which the central bank starts prioritizing inflation risk. The Fed's new guidance could easily be walked back if needed, dependent on how the recovery proceeds, though incoming U.S. data are likely to affirm ongoing robust economic revival.

[EUR, USD]
EUR-USD's prevailing bias has shifted to the downside. The break lower this week, at the prompt of dollar gains following the Fed's hawkish tilt, affirmed by a sharply lower daily closes, follows a several-week phase of waning upside momentum. We are currently targetting the pair to the. 1.1800 area and below. Incoming remarks from ECB members have been remaining firmly dovish, which looks likely to remain the case. The approaching completion of the ratification process of the EU's 750 bln euro recovery fund should be monitored as being a euro positive, although outsize stimulus in the U.S. and a greater growth differential potential should favour the dollar.

[USD, JPY]
USD-JPY ebbed to a two-day low at 109.97, having dropped back from the 11-week high that was seen yesterday at 110.82. The yen has posted gains versus other currencies, finding some safe-haven support as global asset markets sputter. The CAD-JPY cross, for instance, which had been a popular long during the reflation trade, has dropped to a six-week low at 88.86. AUD-JPY and NZD-JPY have also come under notable pressure, printing respective three- and one-month lows earlier. The BoJ maintained its monetary policy settings following the conclusion of its two-day review, as had been widely anticipated. The central bank also extended its pandemic funding relief program by six months, as was predicted by the Nikkei newspaper earlier in the week. This didn't impact the yen.

[GBP, USD]
Cable has extended to a fresh six-week low at 1.3956 on the back of broad dollar gains that have been seen following the Fed's decision to hit the let's-start-thinking-about-tapering button. Aside from dollar firmness, the pound has also come under broader pressure today, reversing a large portion of the gains it saw against the euro over the prior two days, for instance. The risk-off sentiment in global markets, as markets digest the Fed's tilt to the hawkish side, is a negative for the pound, with the UK economy being open and having a large current account deficit. UK retail sales for May also unexpected contracted by 1.4% m/m after rising sharply, by 9.2% m/m, in the month prior. New Covid infections also spiked by over 9k yesterday, though there is a silver lining to this cloud in that the spread is being accounted for by younger unvaccinated adults. In the coming weeks, the vast majority of adults over the age of 18 will have been vaccinated with at least one dose. Well over 80% of the adult population now have antibodies, whether through vaccination or having had the virus in the past, and there is growing evidence that exiting vaccines are resistant to the Indian variant (especially among those who have received the double dose).

[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 has edged out a fresh seven-week high at 1.2388 in what is the biggest rally phase the pair has seen since last March. The pair has been underpinned by a cocktail of wider U.S. over Canadian yield differentials and a drop in oil prices, with the Fed's hawkish tilt having unsettled commodity markets. The CAD-JPY cross, meanwhile, which had been a popular long during the reflation trade, has concurrently dropped to a six-week low at 88.86. Oil prices, by the measure of the WTI benchmark, were showing a loss of nearly 4.5% from the pre-Fed announcement 32-month high through to yesterday's one-week low at $69.77. For now, the prevailing bias looks likely to remain to the downside with regard to the Canadian dollar.