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Forex - Dollar Steady; Euro Recovers from Italy Shock; U.K. GDP Eyed

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The dollar was mixed within relatively narrow ranges Friday at the start of European trading, after the Chinese yuan defied some weak factory gate inflation data to end the week on a stable note.

In Europe, the euro recovered most of its Thursday losses after the eruption of the latest political crisis in Italy, where Matteo Salvini, the head of the right-wing populist Lega party, called for new elections in a move to cement his power. The reaction was more violent in the bond and stock markets, where Italian assets sold off dramatically.

By 3:30 AM ET (0730 GMT), the euro was at $1.1188, up 0.2% from overnight lows. It was relatively unmoved by data for French industrial production in June, which fell by a greater-than-expected 2.3%, consistent with the dismal pattern in neighboring Germany.

The British pound remained under pressure ahead of second-quarter gross domestic product figures, which are due at 0830 GMT. Prime Minister Boris Johnson was reported on Thursday to be planning a general election in early November, days after the country’s scheduled departure from the EU.

The dollar index, which tracks the greenback against a basket of currencies, was effectively unchanged at 97.403

The latest rant by President Donald Trump against the strength of the dollar and the Federal Reserve via Twitter on Thursday has had no lasting effect on the market, beyond reminding participants of the risk of intervention to depress the dollar.

“A currency war has not erupted – at least, not yet. But the danger is real,” said ING analyst Benjamin Cohen. “Relations between the world’s two largest economies could go from bad to much worse.”

Cohen noted that the Trump administration’s labeling of China as a currency manipulator may lead China to respond in kind to save face, through measures such as a ban on the export of rare earth elements vital for high-tech manufacturing.

Figures released earlier Friday showed China’s producer price inflation index turning negative for the first time in three years, stoking fears that it will ‘export deflation’ to the rest of the world as it did between 2012 and 2016.

The yuan, however, stayed well within the range it had traded in this week. On the mainland it fell by less than 0.1% to 7.0503 to the dollar, while in the less regulated offshore market, it rose fractionally to 7.0757. The discount to the People’s Bank of China’s fixing narrowed as the central bank pegged the yuan at a new 11-year low of 7.0136.

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'RBI policy to remain accommodative, more rate cuts likely in future'

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The Reserve Bank of India (RBI) policy stance is clearly pro-growth, which is critical to achieve the target of becoming a $5-trillion economy by 2025. Of late, the Indian economy has been going through a challenging phase. GDP growth, although still high in comparison to other major economies, has been falling short of expectations. Recently, the International Monetary Fund (IMF) cut the gross domestic product (GDP) growth forecast to 7 per cent from 7.3 per cent for FY20.

RBI itself has cut the GDP growth target to 6.9 per cent from 7 per cent for FY-20. It expects the first half of FY20 to clock growth of 5.8 per cent to 6.6 per cent and the second half to clock growth of 7.3 per cent to 7.5 per cent. But the risks are somewhat tilted to the downside.

The weakening of demand along with the liquidity crisis in non-banking financial companies (NBFCs) are the two biggest challenges right now, and the central bank has clearly focussed on these two issues. It raised the ceiling for banks' exposure to a single NBFC to 20 per cent of the bank’s Tier-I capital, from 15 per cent earlier. It also relaxed the definition of priority sector lending, so that banks can lend to those NBFCs that further lend to such sectors. RBI has also announced the setting up of a central payments fraud registry to track the systems for frauds. It is expected to come up with detailed guidelines by the end of August to tackle the NBFC crisis. These measures, taken to increase flows to NBFC, is credit-positive and should enhance lending.

The inflation is firmly below the target level of 4 per cent, but there are clear signs of decline in consumption. The private sector is still hesitant on committing capital expenditure. The global economic condition has also been unfavourable for quite some time. The uncertainties of Brexit and the US-China trade war are persistent, along with the political turmoil in the Middle East. In this backdrop, RBI has been taking proactive measures to spur demand growth. This was the fourth consecutive cut in the repo rate, which now stands at 5.4 per cent. The economy is expected to start coming back to its high growth path as the benefits of rate cuts are gradually passed on. And as the balance sheets of banks become cleaner, we believe that they will accelerate the passing on of rate cuts to consumers and businesses.

Given the global economic outlook and the challenges on the domestic front, the economy may take some more time to start performing as per expectations, and therefore the policy stance is expected to remain accommodative. The inflation outlook remains benign, and therefore one can expect more rate cuts in the future.

EUR/GBP approaches 2019 highs near 0.9250

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  • EUR/GBP moves closer to YTD tops, trades around 0.9250/55.
  • UK advanced Q2 GDP disappointed estimates today.
  • UK’s M.Gove suggested a bank holiday on November 1.

EUR/GBP is now picking up extra upside traction and moves at shouting distance from yesterday’s 2019 highs in the 0.9250/60 band.

EUR/GBP bid after poor GDP figures

The Sterling is not only suffering from the rising uncertainty around Brexitand the clear possibility of a ‘no deal’ outcome, but it is also deriving extra weakness from miserable prints from advanced Q2 GDP figures released today.

In fact, the UK economy is now seen contracting 0.2% QoQ during the April-June period and it is expected to grow at an annualized 1.2%, both prints coming in noticeably below forecasts.

Further poor UK data saw Business Investment expected to contract at a quarterly 0.5% in Q2 and Manufacturing Production contracting at a monthly 0.2% during June. On the brighter side, Industrial Production contracted less than expected (0.1% MoM) and the trade deficit shrunk to £7.01 billion also in June.

On the Brexit front, preparations for a ‘no deal’ scenario stay on the rise, as M.Gove suggested earlier today a bank holiday on November 1 in order to mitigate the potential consequences to the banking system of the ‘hard’ UK-EU divorce.

What to look for around GBP

The outlook on the British Pound looks increasingly fragile pari passu with rising odds for a Brexit ‘no deal’ on October 31. In the meantime, the Irish backstop remains the exclusive obstacle for the resumption of talks between London and Brussels, although the subject appears relegated in light of preparations for the worst-case scenario. Back to the UK economy, poor flash Q2 GDP figures published today added to the already gloomy panorama from UK fundamentals, keeping the sour prospect for the economy and the currency unchanged. At last week’s BoE event, the central bank kept the monetary conditions unchanged, although it refuses to factor in a ‘no deal’ scenario in its projections. The BoE still sees a ‘soft Brexit’ outcome and reiterated that rates are seen increasing gradually in order to bring inflation to the bank’s target.

EUR/GBP key levels

The cross is advancing 0.47% at 0.9255 and faces the next up barrier at 0.9265 (2019 high Aug.8) followed by 0.9306 (2018 high Aug.29) and finally 0.9411 (monthly high Oct. 2009). On the flip side, a breach of 0.9088 (low Jul.31) would open the door to 0.9074 (21-day SMA) and then 0.9051 (high Jul.17).

EUR/USD is consolidating – Commerzbank

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According to Commerzbank, EUR/USD is consolidating just below resistance at 1.1285 and the 200 day ma at 1.1296 and the consolidation is viewed in a positive light.

Key Quotes

“Key resistance is 1.1360/77, the 2018-2019 down channel and the 55 week ma. A weekly close above this latter level is needed for us to adopt an outright bullish stance. Dips lower are likely to find some support circa 1.1150/06. Key support is the 1.0967 2018-2019 support line and below here lies the 78.6% retracement at 1.0814/78.6% retracement.”

“The market will need to regain the 55 week ma and channel at 1.1360/77 to generate upside interest.”

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