FX Market Update 11-6

Market Briefs

• EUR/USD 0.24%, USD/JPY 0.42%, GBP/USD -0.31%, EUR/GBP 0.55%
• DXY 0.01%, DAX 0.48%, FTSE 0.7%, Brent -0.94%, Gold -0.18%
• N.Korean, U.S. officials air differences on eve of summit; Trump stays positive
• “Fair trade, fool trade”, Trump’s tweets spew ire on NATO allies, Trudeau
• GB Apr Industrial Output YY, 1.8%, 2.7% f’cast, 2.9% prev
• GB Apr Manufacturing Output MM, -1.4%, 0.3% f’cast, -0.1% prev
• GB Apr Manufacturing Output YY, 1.4%, 3.1% f’cast, 2.9% prev
• GB Apr Goods Trade Balance (GBP), -14.04 bln, -11.35 bln f’cast, -12.29 bln prev
• Britain’s May to urge Conservative unity before parliament’s votes
• Mexico minister calls for ‘flexibility’ in reworking NAFTA
• Bitcoin tumbles as hackers hit S.Korean exchange Coinrail
• Oil prices slip as U.S. and Russian supplies grow
• Gold dips on uncertainty about Fed, U.S.-N.Korea summit

Looking Ahead – Economic Data (GMT) 
• 15:00 New York Fed Survey of Consumer Expectations (May)

Looking Ahead – Events, Other Releases (GMT) 
• 15:00 Angela Merkel meets heads of the IMF, WTO, the World Bank, the ILO and the OECD for talks in Berlin
• 15:45 FedTrade operation taking 30-year Ginnie Mae (max $510 mn)
• 17:20 German Finance Minister Peter Altmaier speaks at opening of CEBIT Business Fair for Innovation and Digitization

Commentary and Analysis

EUR/USD rally loses momentum as focus turns to Fed (nL1N1TD07Q)

• Italy vow to stay in euro boosts EUR/USD to 1.1821 in Europe
• Italy 10-year yield currently down 22bp on the day at 2.91%
• EUR/USD rally loses momentum with pair dropping to 1.1790 ahead NA open
• Those short are pinning hopes coming Fed hike boosts USD Wednesday
• However, the weaker euro is certain fuel for ECB hawks on Thursday
• Over 1.1845 may spark squeeze. Bears need sub 21-DMA 1.1738

USD/JPY sees biggest one-hour gain of June as risk rebounds (nL1N1TD06I)

• Asia saw USD/JPY’s biggest on one-hour gain of June in Asia as NK is focus
• Ldn subsequently builds on this to register the fourth latest one-one gain
• Wider 10-yr UST-JGB spread also fuelling USD/JPY’s latest rise
• USD/JPY bulls rebound to focus once again on the 200-DMA
• Japanese exporter offers remain in size above 110.00, could limit gains
• Officials air differences on US-NK summit eve; Trump positive

Sterling hurt by very disappointing UK economic data (nL1N1TD06X)

• GBP/USD down to 1.3361 intra-day low on much worse than expected UK data
• Apr mfg output -1.4% vs +0.3% f/c, biggest drop since Oct 2012 nL4N1TD2Y7
• Industrial output -0.8% vs +0.2% f/c. Construction output +0.5% vs +2.0% f/c
• Goods trade deficit GBP 14.035bln vs 11.35bln f/c, widest since Sept 2016
• Data misses are blow for hawks advocating BoE rate hike on Aug 2
• 1.3441 was early Europe high (pre-UK data). 1.3355 was Friday’s low

AUD/USD supported by rise in risk appetite pre-Trump/Kim (nL1N1TD07Y)

• AUD/USD elicited fresh support pre-0.7600 after retreating from 0.7616
• 0.7616 was European am high. 0.7602 was pullback low from 0.7614 Asia high
• Ascent to 0.7614 spurred by rise in risk appetite: Nikkei closed up 0.48%
• 0.7575 was early Asia low after tense weekend G7 meeting
• Trump-Kim summit in Singapore Tuesday, AUD could react to it
• 0.7560 was AUD/USD low Friday on decline in risk appetite

COMMENT

May’s Brexit test to dictate GBP/USD’s direction 
Cable could rise towards 1.36, a key technical level, if Tory PM May successfully navigates a tricky week in the UK parliament, when MPs will be voting on the shape of Brexit. May will today continue efforts to persuade rebel MPs to back her government, ahead of House of Commons votes on Tuesday and Wednesday. Pro-EU Tory MPs have to reflect on the fact that shooting May’s Brexit plan down could weaken her leadership and result in a “hard” Brexiteer succeeding her in number 10 ahead of Britain’s scheduled EU exit in March 2019. Sterling could fall sharply if that came to pass. Ladbrokes currently quotes 11/8 for May to be replaced as PM this year versus 2/1 seven days ago. Ladbrokes and Paddy Power make prominent eurosceptic Michael Gove the favourite to be the next Tory leader, with William Hill making ardent Brexiteer Jacob Rees-Mogg the favourite. 1.36 approximates to cable’s 200-day moving average.

S.Africa rand could see brief reprieve post-Fed
Like other emerging market FX, the South African rand is at the mercy of the Fed and ECB meetings this week though an overbought USD/ZAR could be ripe for a pullback. An FOMC interest rate rise is already heavily discounted but there’s still room for a post-hike knee-jerk rally in USD/ZAR should the Fed up the hawkish rhetoric. However, price action since last week’s topside break-out has tipped the charts into overbought territory and a retreat may be on the cards after the FOMC. A drop back inside the 30-DMA Bollinger envelope 13.0105 could be a viable objective with the daily tenkan at 12.87 offering value. Any pullback though would provide an opportunity to pick up dollars at cheaper levels before the fundamental backdrop takes the rand lower again

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Futuro del peso mexicano 11-6

Drivers for the Week Ahead

  • The Federal Reserve, the European Central Bank, and the Bank of Japan hold policy meetings
  • Trump positioned himself as an outsider at the G7 summit
  • Before the ECB meeting, both Italy and Greece will sell 12-month T-bills
  • We expect continued EM FX weakness, which should lead to more policy responses
Bstops 497  Sstops 485
50 HMA= 488.90
200 HMA= 495.6
Futuro del peso mexicano 11- 6

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

Futuro del peso mexicano 8-6

  • Yesterday USD/MXN topped influential Feb 2017 peaks at 20.5400/20.545
  • Targets 76.4% Jan-Jul 2017 drop from 22.044 to 17.45 which is 20.9598
  • 76.4% retrace is effectively the point of no return for a correction
  • Break over will refocus attention on the prospect of new record highs
  • Traders are terribly positioned, short USD when last CFTC data was complied
  • Compares to big long USD possies when USD/MXN last rallied to similar levelsFuturo del peso mexicano 8 - 6

Futuro del peso mexicano 7-6

  • Mexico May inflation data 13GMT. Core f/c 3.68% yy from 3.71% (4.87% Dec 17)
  • Peso’s 12.7% plunge in May suggests big upside risk for inflation data
  • USD/MXN at 20.375 is elevated near its recent 20.4875 high
  • Consolidation near peak is bullish sign suggesting break 20.50 options soon
  • Dips from highs have been too shallow to lead to successful barrier defence
  • Break Feb 17/20 2017 peaks 20.54/545 targets 76.4% 2017/18 drop @ 20.9626
50 HMA= 490.30
100 HMA= 495.00
Futuro del peso mexicano 7 - 6

FX Market Update 6-6

Market Briefs
• EUR/USD 0.44%, USD/JPY 0.34%, GBP/USD 0.24%, EUR/GBP 0.16%
• DXY -0.28%, DAX 0.37%, FTSE 0.35%, Brent 0.57%, Gold -0.04%
• ECB to debate ending bond buys next week: Praet
• Plausible that ECB can end bond buys this year: Weidmann
• EU set to impose extra tariffs on U.S. imports from July
• EU lawmaker rules out “mutual recognition” for UK financial firms
• Pressuring May, UK’s Labour tries to force new single market deal
• Iran’s uranium enrichment plans are close to the “red line” – French minister
• Gold ticks up on soft dollar, investors cautious amid trade tensions
• Oil prices higher on Venezuela exports concerns

Looking Ahead – Economic Data (GMT)
• 11:00 US MBA Mortgage Applications, -2.9% prev
• 11:00 US Mortgage Market Index, 356.1 prev
• 11:00 US MBA Purchase Index, 242.7 prev
• 11:00 US MBA 30-Yr Mortgage, 4.84% prev
• 12:30 US International Trade $, -49 bln f’cast, -49 bln prev
• 12:30 CA Building Permits MM, 3.1% prev
• 12:30 CA Trade Balance C$, -3.40 bln f’cast, -4.14 bln prev
• 14:00 CA Ivey PMI, 70.4 prev
• 14:00 CA Ivey PMI SA, 71.5 prev

Looking Ahead – Events, Other Releases (GMT)
• 11:15 Irish Finance Minister speaks at event in Dublin
• 13:30 ECB Member of the Supervisory Board Pentti Hakkarainen speaks in Lisbon
• 17:10 ECB Member of the Supervisory Board Ignazio Angeloni speaks in Brussels

Currency Summaries
*NOTE: Focus for this section will shift to a more topical, regional-based coverage that spans multiple currencies. Please look for this change in the coming days.

EUR/USD
• EUR/USD boosted as traders mull risk of a more hawkish ECB position
• ECB’s Weidmann says ending bonds buys this year would only be first step
• ECB’s Praet says ending bond buys at end 2018 is up for discussion
• Probability of Jun 19 hike rises to 70%, hike almost fully priced in July
• 10-Year bund yield rises to a 1 1/2 week high up 6bps on the day
• EUR/USD trades 1.1771 above 21-DMA @ 1.1753. 38.2% Apr/May drop is 1.1855

USD/JPY
• Yen has been sold on the continued “risk on” environment
• On Tuesday the talk was of big Japanese megabank offers above 110.00
• Japanese exporters also mixed in, so these might limit USD/JPY gains
• Recall the high on Tuesday was 110.01, range today has been 109.79-110.19
• Market now grapples with the 200-DMA, needs close above

GBP/USD 
• Cable extended north to a two-week high of 1.3438 during the European am
• Ascent influenced by EUR/USD short-covering on risk of more hawkish ECB
• ECB monetary policy meeting next week (June 14), 7 days before BoE MPA
• EUR/GBP rose by a quarter-penny to 0.8767 during the European am
• 1.3418 was GBP/USD high in Asia, with ensuing retreat basing circa 1.3400
• 1.3400 is a former resistance level (1.3398 was Monday’s high)

USD/CHF
• EUR/CHF rose to a nine-day high of 1.1620 during the European am
• Ascent fuelled by hawkish comments from ECB chief economist Praet
• There is an ECB monetary policy meeting next week (June 12)

USD/CAD
• USD/CAD is eyeing 1.2915 after falling from 1.2955 (European am high)
• 1.2915 was Tuesday’s low–before the jump to 1.3068 (11-week high)
• Canada April trade data due 1230GMT. May Ivey PMI due 1400GMT
• 1.2900 option expiry for 10am ET NY cut (1400GMT), USD 425mn strike
• Bank of Canada Financial System Review due 1430GMT

AUD/USD
• Profit-taking on longs helped deflate AUD/USD to 0.7639 during European am
• 0.7673 was six-week high in Asia after the Australian Q1 GDP beat
• Prior profit-taking on longs helped deflate AUD/USD to 0.7595 Tuesday
• A US bank reportedly went long near 0.7595, initial target 0.7810, stop 0.7475
• 0.7810/13 = April high. Stop set two pips under last week’s low (May 30)

NZD/USD
• NZD/USD rose to a five-week high of 0.7060 in early European trade
• Ascent aided by a rise in risk appetite: Nikkei closed up 0.38% today

FX OPTION EXPIRIES WED 6 JUNE
• EUR/USD: 1.1600 (1.2BLN), 1.1650 (1.5BLN), 1.1680-1.1700 (742M)
• 1.1750-60 (1BLN), 1.1800 (1.8BLN), 1.1825 (1.4BLN)
• GBP/USD: 1.3425 (303M). AUD/USD: 0.7600-10 (546M), 0.7650-55 (402M)
• NZD/USD: 0.7000 (271M)
• USD/CAD: 1.2860-65 (490M), 1.2880 (370M), 1.2900 (425M)
• USD/JPY: 108.85 (432M), 109.00 (1.4BLN), 109.70-75 (750M), 110.00 (502M)
• EUR/JPY: 127.00 (773M), 128.50 (1.8BLN)

COMMENT

UK MPs’ Brexit votes could roil sterling next week
Sterling is in for another Brexit sentiment test next week when UK MPs vote on PM May’s EU exit blueprint. The votes on June 12 could simultaneously increase the probability of a relatively ‘soft’ Brexit–which would be positive for GBP, while casting doubt on whether May will remain PM through Britain’s scheduled EU exit in March 2019. A May exit before Brexit could destabilise the pound. The opposition Labour Party said in a statement Tuesday that it had submitted an amendment to the EU withdrawal bill calling on the government to negotiate full access to the EU’s single market. This was headlined by the Times newspaper on Wednesday as “Labour bids for ‘softest’ Brexit deal in new shift”. MPs in the Commons will debate the Brexit legislation next Tuesday, with votes expected after 1800 GMT. May’s government will ask MPs to overturn some of the 15 changes to its Brexit legislation made by peers in the Lords.

CHART OF THE DAY

EUR/USD short-covering may dominate as June ECB eyed 
EUR/USD short-covering may dominate ahead of the June 14 ECB meeting with potential to boost the pair as high as 1.1962, though gains beyond 1.2000 seem unlikely. The June ECB meeting is on the market’s radar after ECB chief economist Praet said today policymakers will debate ending its bond purchases, lifting EUR/USD. Recent euro weakness and a pickup in inflation is boosting the chance of a more hawkish spin from the ECB, prompting some of those short EUR/USD to start covering positions. With EUR 7.5 billion shorts added in May alone, the likelihood of EUR/USD being well supported in early June is high and a close over the 21-DMA at 1.1753 may prompt a rally towards 1.1855 or 1.1962, 38.2/50% retracements of April-May 1.2414-1.1510 drop. It would take a rally over May’s peak at 1.2084 to really rattle EUR/USD bears and with the 200-DMA at 1.2012 and notable option interests around 1.2000-1.2100, that’s unlikely. Failure to close over the 21-DMA suggests a strong test of 1.14-1.15

Futuro del peso mexicano 6-6

  • USD/MXN extends the rally to 20.4875 thanks to trade fight with U.S.
  • Break Feb 2017 twin peaks 20.54/545 targets 20.7475, 20.936
  • USD/MXN vaults 61.8% ret 2017/18 drop @ 20.2891 targets 76.4% @ 20.9598
  • EUR/MXN at record peaks and more gains likely given focus on hawkish ECB
  • EUR/MXN 24.0810 peak. 50% fib pro off Apr-Dec 17 rise is 24.108
  • 61.8% and 100% projections at 24.5847/26.128
50 HMA=  493.30
Futuro del peso mexicano 6 - 6

FX Market Update 5-6

Market Briefs
• EUR/USD -0.05%, USD/JPY -0.08%, GBP/USD 0.53%, EUR/GBP -0.56%
• DXY -0.02%, DAX 0.92%, FTSE -0.54%, Brent -1.29%, Gold 0.06%
• EU Markit Serv Final PMI, 53.8, 53.9 f’cast, 53.9 prev
• EU Markit Comp Final PMI, 54.1, 54.1 f’cast, 54.1 prev
• FR Budget Balance, -54.34 bln, -33.10 bln prev
• FR Markit Serv PMI, 54.3, 54.3 f’csat, 54.3 prev
• FR Markit Comp PMI, 54.2, 54.5 f’cast, 54.5 prev
• DE Markit Services PMI, 52.1, 52.1 f’cast, 52.1 prev
• DE Markit Comp Final PMI, 53.4, 53.1 f’cast, 53.1 prev
• GB BRC Retail Sales YY, 2.80%, -4.20% prev
• GB Markit/CIPS Serv PMI, 54, 53 f’cast, 52.8 prev
• Italy’s “government for change” seeking parliament’s backing
• Spain’s Socialists to name Maria Jesus Montero as new budget minister – PM aide
• Financial services to remain ‘national priority’ after Brexit – UK minister
• Qatar accuses Saudis of reckless behaviour after military threat report
• Gold steady amid rising risk appetite and U.S. rate-hike prospects
• Brent crude tilts lower as investors weigh supply rises

Looking Ahead – Economic Data (GMT) 
• 12:30 CA Labor Productivity Rate, 0.2% prev
• 12:55 US Redbook YY, 4.3% prev
• 13:45 US Markit Comp Final PMI, 55.7 prev
• 13:45 US Markit Svcs PMI Final, 55.7 prev
• 14:00 US ISM N-Mfg PMI, 57.5 f’cast, 56.8 prev
• 14:00 US JOLTS Job Openings, 6.400 mln f’cast, 6.550 mln prev

Looking Ahead – Events, Other Releases (GMT) 
• 11:20 The Head of Division at Bank of England, Martin Etheridge, speaks in London
• 17:30 Jens Weidmann, president of Deutsche Bundesbank, speaks in Brussels

Currency Summaries
*NOTE: Focus for this section will shift to a more topical, regional-based coverage that spans multiple currencies. Please look for this change in the coming days.

EUR/USD 
• EUR/USD trades a tight range close to 1.1700 anchored by options
• EUR/USD 1.1684-1.1708 in Asia and 1.1684/1.1716 in Europe
• EUR 2.8 bln expiries 1.1680-1.1725 today
• EZ data disappointed. EZ sales 0.1% vs 0.5% f/c. Service PMI slips to 53.8
• In contrast U.S. May services ISM is f/c higher to 57.5 from 56.8
• Data is due at 15.00GMT when today’s options will expire

USD/JPY
• An elevated USD/JPY trades a narrow 109.73-110.01 range so far today
• Yen has been sold on weak Japan data and continued “risk on” environment
• Wider 10-year UST-JGB yield spread has also continued to prop USD/JPY
• 30-day log correlation between USD/JPY and 10-year UST-JGB spread is high
• USD/JPY bulls face twin obstacles, 61.8% Fibo and 200-DMA
• Spot could rise to 111.50, according to options

GBP/USD
• Cable rose to 1.3384 after UK service sector PMI beat, 54.0 vs 53.0 f/c
• 1.3335 was high before the 0830GMT data release
• EUR/GBP down to 0.8743 on UK data beat vs 0.8785 early Europe high
• Service PMI beat follows UK manufacturing and construction PMI beats
• IHS Markit says May PMIs point to UK GDP growing at 0.3-0.4% in Q2
• BoE kept rates unchanged in May after meagre GDP growth of 0.1% in Q1

USD/CHF
• EUR/CHF has fallen to 1.1523 from an early Europe high of 1.1561
• Bids may emerge near 1.1500 (1.1503 was last Friday’s low)
• 1.1500 option expiry for 10am ET NY cut, EUR 226mn strike

USD/CAD
• USD/CAD has risen to 1.2972 from an early Europe low of 1.2915
• NAFTA fears are helping weigh on the CAD
• Mexico set to impose 20% tariff on U.S. pork legs – sources (Reuters)
• Offers expected around 1.3000 (1.3009 was last Friday’s high)

AUD/USD
• Profit-taking on longs helped deflate AUD/USD to 0.7623 European am low
• AUD/USD rose over 1% to a six-week high of 0.7666 Monday
• Bids are tipped near 0.7600 (former resistance level)
• Australian Q1 GDP data is due Wednesday at 0130GMT, +0.9% f/c
• RBA flagged upbeat outlook alongside unchanged cash rate decision

NZD/USD
• NZD/USD met headwind pre-0.7048 after rising from 0.7019 (late Asia low)
• 0.7048 was Monday’s 1mth high after rise in risk appetite boosted NZD
• GDT auction result expected circa 1400GMT, may impact NZD

FX Options
• Front end G10 Implied vols return to pre spike levels as calm returns
• Back end vols and EUR put options still underpinned by lingering euro concerns
• Lower vol levels attracting some demand now to limit deeper declines
• Huge 5bln expiries 1.1675-1.1750 today helping to contain EUR/USD again
• USD/JPY flows in to sub 1-month strikes toward 111.50 suggest upside potential

COMMENT

UK CPI upturn next week may lift sterling 
UK inflation data for May due next week will dictate sterling’s fortunes and the currency could catch a bid if the report shows annualized CPI rose from April’s 13-month low of 2.4%. A CPI rise would be a welcome boost for hawks advocating a BoE rate hike on Aug 2, as annualized CPI has been on a downward trajectory since scaling a five-year peak of 3.1% last November. The pound’s 3.43% fall against the USD last month could contribute to a reversal of the recent CPI downtrend, as could higher oil prices. The BBC reports that the RAC says UK petrol prices rose by six pence a litre in May, the biggest monthly increase since the RAC began tracking prices 18 years ago. UK earnings data is also due next week, a day before the inflation figures. On Monday, BoE MPC member Tenreyro said the timing of BoE rate hikes is an “open question”.

CHART OF THE DAY

EUR/USD set for usual June rise as focus turns to ECB
EUR/USD looks poised to head higher in coming weeks, especially if the new Italian government does not distract market focus away from the ECB, and as EUR/USD normally makes gains in June. An analysis of EUR/USD’s performance for each June since the year 2000 shows it has risen in 12 of the last 18 years, gaining on average 63 pips or 0.62%. Last week’s political uncertainty in Italy helped EUR/USD trade the eighth widest one-week range of 2018 (218 pips), but spot ended last week very close to where it started. Despite this indecision, the fact that last week’s candlestick line had quite a long lower shadow is normally a sign the market has rejected the downside. EUR/USD traders’ focus will increasingly turn to the timing of any ECB monetary tightening, especially as euro zone inflation was well above expectations in May. The rising and thick Ichimoku weekly cloud, which currently spans a 1.1216-1.1681 region, is providing a major technical prop for EUR/USD.