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Daily Currency Update

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This week's hawkish Fed shift has changed USD forecasts dramatically

USD: The trade-weighted dollar has rallied around 1.5% this week. The $ is firmer across the board - up as much as 2.5% against the commodity bloc and as little as 0.5% against the JPY. The commodity bloc, in particular, has suffered on the toxic cocktail of the FOMC meeting. What we can say is that this week's events will emphasize the existing trends that those currencies backed with a path to monetary normalization will out-perform. Today will be quiet, however, with little on the US data calendar and US market trading calming in respect of the newly-signed into law Juneteenth public holiday.

CAD: The CAD continues to weaken in the wake of the FOMC decision. The move lower in the CAD has reflected profit-taking and position adjustment as underlying CAD fundamentals remain constructive. Crude oil prices remain elevated. Higher than expected May inflation data has focused some attention on the resulting deterioration in Canadian real yields. For today, expect the USD/CAD to approach resistance at 1.24000/1.2425.

EUR: The ECB will be looking to use this period of dollar strength wisely and be sure to insert a wedge between Fed and ECB expectations. ECB Chief Economist, Philip Lane, did this yesterday by suggesting at what seems to be a big ECB meeting in September the ECB may still not have enough data to make any changes to its dovish policy. Most doubt now EUR/USD can make it much above the 1.1950/80 area on any intra-day correction and momentum may well carry EUR/USD towards the 1.1835 area and potentially 1.1700 should any data/Fed commentary add to tightening fears this summer.

GBP: GBP has been an outperformer this week, losing just 1.5% against the stronger dollar. This is probably a function of where GBP sits on the monetary normalization spectrum. Standing against GBP, however, is positioning but also European event risk. The next few weeks could thus be a vulnerable period for Cable, where a break of 1.3890 opens up 1.3800/3810 - the last stop before an extension to the March/April lows of 1.3675.

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