FX Market Update 8-6

Market Briefs
• EUR/USD -0.42%, USD/JPY -0.37%, GBP/USD -0.06%, EUR/GBP -0.33%
• DXY 0.31%, DAX -0.84%, FTSE -0.72%, Brent -0.93%, Gold 0.18%
• DE Industrial Output MM, -1%, 0.3% f’cast, 1% prev
• DE Trade Balance, EUR, SA, 19.4 bln, 21 bln f’cast, 22 bln prev
• G7 leaders set to clash with combative Trump over tariffs, trade
• Germany urges European unity in face of trade tensions with U.S.
• For high-stakes summit with Kim, Trump trusts his gut over note cards
• Brace for a possible “Brexit meltdown” but don’t panic, UK’s Johnson cautions – BuzzFeed
• China’s export growth steady in May, import growth faster but not from US
• France calls for more German ambition on the euro zone
• It’s up to Italy to tackle its debt pile – German FinMin
• Gold edges up ahead of G7, but dollar recovery caps gains
• Oil prices fall on dip in China demand, surging U.S. output

Looking Ahead – Economic Data (GMT) 
• 12:15 CA House Starts, Annualized, 218k f’cast, 214.4k prev
• 12:30 CA Capacity Utilization, 86% prev
• 12:30 CA Employment Change, 17.5k f’cast, -1.1k prev
• 12:30 CA Unemployment Rate, 5.8% f’cast, 5.8% prev
• 14:00 US Wholesale Invt(y), R MM, 0% f’cast, 0% prev
• 14:00 US Wholesale Sales, MM, 0.3% f’cast, 0.3% prev

Looking Ahead – Events, Other Releases (GMT) 
• No major econ events scheduled

Commentary and Analysis

Weak German data and jump for Italy yields hit EUR/USD
• Interest rate markets quickly unwind the moves previously supporting EUR/USD
• Spec of hawkish ECB forgotten as focus reverts to still elevated Italy risk
• UST/Bund 10-yr spread 6bp wider wiping most of the week’s 9bp narrowing
• Italy 10-year yield jumps as high as 3.12%
• CB buying dips underpins EUR/USD but pair still down around 50 ticks
• German Apr IP -1% vs 0.3% f/c. German trade surplus narrows weaker export

GBP/USD softer as EUR/USD falls on Italian bond yields rise
• Cable drop to threaten 1.3400 spurred by EUR/USD fall from 1.1810 to 1.1772
• EUR/USD fall influenced by Italy bond yields rise nL5N1TA0R3
• EUR/GBP down to 0.8773 (two-day low). 0.8791 was Asia low and NY low
• GBP was negatively impacted by Brexit politics Thursday: 1.3368 = cable low
• Johnson says there could be a “Brexit meltdown” – Buzzfeed
• 1.3453 was rally high from 1.3368 on BoE’s upbeat Ramsden

USD/JPY 5th biggest one-hour June drop as risk aversion up
• London sees 5th biggest one-hour USD/JPY drop of June as bears tighten grip
• Spot falls from 109.85 to 109.28 today, 1.1B 109.00 NY cut options beckons
• Downside USD/JPY fears grow in the options market
• Yen is in demand from risk averse flows via spot and options
• USD/JPY bears are now focused on tenkan at 109.19, close below will weaken
• Tenkan line is wide watched by traders, especially in Tokyo

AUD/USD threatens Monday’s low on loss of risk appetite
• AUD/USD eyeing Monday’s low of 0.7558 after breaking below 0.7576
• 0.7576 was the early Europe low and a Fibo support level
• Recovery rally from 0.7576 topped out five pips shy of 0.7600
• AUD losses fuelled by risk aversion: Hang Seng closed -1.8%
• DAX -1%, S&P e-mini -0.6%. Ldn copper -1.05
• 0.7500 among AUD/USD bear targets (0.7514 = June 1 low after NFP/AHE beats)

USD vulnerable to selling as Fed, ECB eyed (nL2N1T9275)
The dollar could see another round of selling ahead of next week’s Federal Reserve and ECB meetings given its struggle to gain upward traction despite the recent rebound in U.S. Treasury yields. Technicals also suggest further falls, with the USD index, which tracks the greenback versus a basket of six currencies (the euro and the yen are its two biggest constituents), registering its first negative 14-day momentum reading since mid-April. A resumption of EUR/USD gains would have a huge negative effect on the dollar index as despite intraday weakness, euro bulls retain the upper hand going into next Thursday’s ECB meeting where the central bank looks set to discuss an end to its QE. Yen is in demand from risk averse flows via spot and the options market. USD/JPY seems to be heading for a test of 109.00, putting further downward pressure on the USD index. The dollar normally falls in June, a daily close by the index below the 30-DMA (which is at 93.383) will pave the way to 92.440 Fibo — 38.2% of the 88.251 to 95.030 (2018) rise.

UK wages may offer GBP reprieve from Brexit travails 
An upside surprise in UK earnings data next Tuesday may offer the pound a reprieve from its Brexit travails which are back in focus with crunch votes next week. The earnings report is due before a series of UK House of Commons votes on Brexit scheduled for Tuesday evening, before the focus likely turns to UK inflation data Wednesday. Headline earnings growth is forecast at 2.6%, unchanged from previously, with ex-bonus earnings growth forecast at 2.9%. An earnings beat would be a further boost for hawks advocating a BoE rate hike on Aug 2, following this week’s hawkish shift in BoE expectations–which helped inflate GBP/USD to a 16-day high of 1.3472. Annualized CPI is forecast to rise to 2.5% from April’s 13-month low of 2.4%. UK ONS May retail sales data, due Thursday, adds to the event risk for GBP next week. Annualized retail sales growth is forecast to rise to 2.4% from 1.4% in April.

Italy risk and Fed hike to send EUR/USD back to 1.15 
Italy risk remains elevated yet EUR/USD is 270 pips above last week’s low and with the Fed set to hike next week may have been set-up for a fall. A sell-off looks very likely with a 1.1500 retest to follow any close below the 21-DMA at 1.1745. Italian bonds suggest risks for the euro remain very high with the 10-year yield 3.09 percent compared to a closing high last week of 3.10 percent, (traded high 3.38 percent). Yet EUR/USD has staged a rally of almost 3 percent from the lows seen during the turmoil last week. Current EUR/USD strength is even more surprising considering the pair usually undergoes a period of pressure ahead of a U.S. hikes with moves down ahead Dec and March Fed moves around 2 percent. For a change there’s a EUR/USD drop has not been factored in relation to higher U.S. rates but the spread for benchmark U.S./German bond yields is only 10bp below the high for the divergence driving EUR/USD down

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