Sun, Dec 04, 2022 @ 08:49 GMT
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Currency Pair of the Week: EUR/CAD

The ECB meets this week to discuss interest rate policy.  At its last meeting, the ECB hiked rates by 50bps to bring the key rate to 0.00% from negative territory.  The question at this meeting isn’t “if” the ECB will hike rates, but rather “by how much”.  ECB speakers have been on the wires over the last few week with a hawkish slant.  ECB members Schnabel, Villeroy, Kazaks, and Rehn were all on the wires with a hawkish tilt.  In addition, in addition, Vasle supports rate hikes that could exceed 50bps and Muller said the ECB should discuss 75bps rate hike as inflation outlook has failed to improve.  The August CPI flash released last week showed a 9.1% YoY increase inflation vs a prior reading of 8.9% YoY and an expectation of 9.0% YoY.  In addition, the Unemployment Rate down-ticked to 6.6% in July from 6.7% in June.  With high inflation and low Unemployment, will the ECB look to frontload rate hikes by raising 75bps, or will it prefer to gradually raise rates due to recession fears and only increase by 50bps.  The Central Bank may also consider the energy crisis occurring throughout Europe.  If the ECB is worried about higher prices affecting household income levels, it may want to be more cautious.

The Bank of Canada also meets this week to discuss interest rate policy.  After surprising markets by hiking 100bps at its July meeting, the BOC is expected to hike by an additional 75bps when it meets on Wednesday.  Earlier in the month, traders were pricing in a 100 bps hike as the BOC discussed the importance of frontloading policy.  However, since the last BOC meeting, July’s CPI has fallen from 8.1% YoY in June to 7.6% YoY in July.  In addition, Canada’s S&P 500 Global Manufacturing PMI has fallen below the expansion/contraction level of 50 to 48.7.  The Q2 GDP was also weaker than expected at 3.3% vs and expectation of 4.4%.  As a result, markets are “only” expecting a 75bps rate hike now.  So, the question for this week’s meeting seems to be whether the BOC will surprise markets again with a 100bps rates hike or hike only 75bps! The overnight rate currently sits at 2.5%.

On a daily timeframe, EUR/CAD has been moving lower in an order downward sloping channel since March 10th, when price was trading near 1.4234.  Price has been under the 50-Day Moving Average since June 29th and has only broken above it for 1 day on August 31st.  On Jul 11th, EUR/CAD traded below the channel near 1.2973, only to reverse and move back inside it a few days later.  However, price could only retrace to the 38.2% Fibonacci level from the highs of June 22nd to the lows of July 13th near 1.3257.  There price turned lower once again and tested the bottom channel near 1.2877.  EUR/CAD is currently oscillating around the 2015 lows (green) and looking to move lower once again.

Source: Tradingview, Stone X

As price oscillates around the 1.3058 level, EUR/CAD is currently sitting near the 61.8% Fibonacci retracement from the lows of August 25th to the highs of September 1st.  If price is to continue lower, the first level of horizontal support is at 1.2955, then the lows of August 25th at 1.2877.  If price breaks below there, the next level for support is at the bottom trendline of the channel near 1.2855.  However, if price bounces, the first level of resistance is at today’s high of 1.3094, then the 50 Day Moving Average near 1.3130 (see daily).  If price moves above there, the next level of horizontal resistance is at 1.3292.

Source: Tradingview, Stone X

With both the ECB and the BOE meeting this week, the fx markets could be in for some volatility.  If the ECB the delivers a dovish message, Euros could move lower.  In addition, the BOC is hawkish, it may send the Canadian Dollar higher.  This would be a perfect storm for EUR/CAD to move lower.  However, there could be many surprises from these meetings, so keep and eye on the statements and press conferences!
DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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