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Fundamental Analysis

Risk-off Weighs on Euro; Pound Up after UK Data; Dollar Mixed

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Market sentiment remained largely in risk-off mood on Thursday as the latest escalation of tension between North Korea and the United States showed no sign of dissipating. North Korea said today it plans to fire four missiles near the US territory of Guam in the Pacific Ocean, branding President Trump's warning that North Korean threats will be met with "fire and fury" as "a load of nonsense".

The heightened geopolitical anxiety continued to drive gold and the Japanese yen higher as investors sought safety, though the Swiss franc was weaker. Gold extended its gains into a third day, hitting a 9-week high of $1287.73 an ounce. The yen also advanced further after a brief pull-back overnight. However, the Swiss franc fell broadly against other majors as traders were wary of a possible SNB intervention after yesterday's 1% jump against the dollar and the euro. The dollar was last up 0.3% at 0.9660 francs, while the euro was trading marginally higher at 1.1339 francs.

The euro was struggling on Thursday as it came under pressure from the latest bout of risk-off, with traders seeking to unwind some of their positions following the strong rally seen over the past month. The single currency fell to a more than one-week low of $1.1687 yesterday before rebounding to a high of $1.1769 in Asian trading today. It since drifted back towards the $1.17 level before being pushed up by weak US data. The euro was last trading at $1.1733 and was also down on the day against the yen and the pound at 128.61 yen and 0.9023 pounds.

The pound benefited from the euro's weakness via euro/pound cross flows, and was additionally supported by positive UK data released earlier in the day. Industrial output in the UK rose by 0.5% month-on-month in June, beating expectations of a 0.1% increase. On an annual basis, output rose by 0.3%, up from -0.2% in May. Data for the manufacturing sub-component was not as impressive however, as manufacturing production was flat over the month in June, in line with expectations. Trade figures also disappointed as the UK's deficit in goods widened to £12.7 billion in June, missing estimates of £11 billion, though the prior month's deficit was revised slightly lower to £11.31 billion.

Sterling reversed higher from a three-week low of $1.2950 touched prior to the data to climb to just above the $1.30 level in afternoon European trading.

The US dollar meanwhile remained sluggish, with the dollar index being unable to hold on to modest gains from earlier in the session. The greenback faced fresh downside pressure after US producer prices declined the most in 11 months in July.

The producer price index (PPI) for final demand fell by 0.1% m/m in July instead of rising by 0.1% as expected. The 12-month rate missed forecasts too as it dipped to 1.9% from 2.0%. Excluding food and energy components, PPI was also down 0.1% m/m in July, while the annual rate moderated to 1.8% from 1.9%, missing forecasts of 2.1%.

Weekly jobless claims also came in below expectations, though not by much, and still pointed to a strong labour market. Initial claims for unemployment benefits rose by 244k in the week starting July 24. Expectations were for 240k and compares with a revised 241k in the prior week.

The dollar hit a new eight-week low against the yen after the data, dropping to as low as 109.32 yen. The dollar index was slightly up though at 93.62. The US currency found only limited support from a speech by New York Fed President William Dudley, who reiterated the Fed's expectations that inflation will rise to 2% over the medium term.

In commodities, oil prices continued to edge higher, helped by OPEC's latest forecasts for demand. In its latest monthly report, OPEC raised its forecasts for global demand by around 200,000 barrels a day for 2017 and 2018. However, it also showed compliance by OPEC members to the output deal decreased to 86% in July from 96% in June, and higher production from Libya and Nigeria led to an overall increase in OPEC's total output in July. WTI crude was up 0.3% at $49.72 a barrel in late European session, while Brent crude was 0.8% firmer at $53.13 a barrel.

The higher oil prices were of little boost to the Canadian dollar, which continued to move away from its July two-year highs. Dollar/loonie briefly fell sharply to 1.2668 after the US data before quickly bouncing back to trade around 1.2715. There was not much reaction to Canadian housing data, which showed new home prices rose by 0.2% in June, missing expectations of 0.4%.

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