The euro has been boosted in recent times by rising ECB interest rate expectations as rates markets now anticipate over 100 basis points of tightening into year end, starting with the first hike in July. The timing of the ‘lift-off’, in July, has been well communicated by doves and hawks within the ECB’s governing council and so it just remains a question of by how much.
Persistent inflation keeps the Fed’s path very much on track while geopolitical uncertainty (Russia/Ukraine/China) drags on. Jerome Powell mentioned in an interview with WSJ that the Fed isn’t looking at nuanced detail in the data to suggest inflation is cooling and that a drastic decline in the level of prices is required to alter the Fed’s current rate of tightening.
EUR/USD comes up against near term resistance via the prior low of 1.0757 which coincides with the 50 SMA, currently keeping prices at bay. The next level of resistance appears at 1.0805 and the underside of the long term trendline from 2017. If prices are to turn lower from here, the 2020 low of 1.0635 comes into focus before a return to the zone of support at 1.0450.
Trade accordingly with your risk
As has been the case in recent months, equity markets remain the key driver for the Canadian Dollar. Therefore, with the upside in equities tentative at best and the bias very much a sell on rallies, dips in USD/CAD are likely to be supported. At the same time, USD/CAD vs rate differentials and oil prices signal that the pair is trading at fair value. Looking ahead to the near future, the economic calendar is relatively light. As such, while Canadian retail sales is on tap, this will unlikely prompt a notable move in the Loonie given that the data will not move the needle for BoC policy. As a reminder, the Bank of Canada is expected to raise interest rates by 50bps at its upcoming.
USD/CAD above 1.30 was a tough area to hold above, particularly with key resistance in the form of the 200WMA. Momentum indicators have softened as of late amid the rather stagnant price action and thus we look to equity markets for direction. On the downside, support is situated at 1.2740 and below at 1.2700.
Crude oil prices remain in a fairly consolidative state. A bearish Evening Star candlestick pattern formed last week, offering a preliminary reversal signal. However, downside follow-through has been noticeably absent, undermining the Evening Star. Immediate resistance appears to be the 113.72 – 116.61 zone that was established in late March.
Recent consolidation does mean that WTI is inching closer towards the key rising trendline from the beginning of December. The latter has been maintaining the broader upside focus, with tests occurring in April and earlier this month. From here, the trendline is also closely aligned 103.83.
Clearing downward would expose the 92.95 – 95.11 support zone, but not necessarily shift the broader horizon bearish. Falling to that zone would mean a more neutral setting, a pivot from the mostly upward stance since the end of last year. Falling under could be that bearish shift, exposing the 85.38 inflection point. Otherwise, clearing resistance places the focus on the 124.76 – 129.41 zone above.
Trade accordingly with your risk
The recent sell-off in EUR/GBP may be coming to an end as ECB governing council members continue to opine that the central bank will shortly start hiking interest rates in an attempt to stave off rising inflation. The ECB’s deposit rate of -0.5% is set to return to positive territory this year with the outline of a series of 25 basis point rate hikes expected to be tabled at the June 9 meeting and started at the July 21 meeting. Current market pricing is for around 90 basis points of tightening this year, implying that four 25 basis point rate hikes may be on the cards this year. The ECB, along with a range of other major central banks, is battling with an unwelcome double of sky-high inflation – 7.5% in April according to a flash estimate from Eurostat – and faltering growth. The European Commission recently downgraded European growth to 2.7% in 2022 from a prior expectation of 4%.
The Bank of England (BoE) is also expected to continue hiking rates. The UK central bank has already raised the Bank Rate by a total of 90 basis points to 1%, the highest level in 13 years, to try and dampen runaway price pressures. While the market expects a further 115 basis points of rate increases this year, UK growth is expected to slow sharply in 2023, leaving the BoE battling rampant inflation and weakening growth. The projected 1%+ of rate hikes over the rest of 2022 may not play out if growth continues to erode.
Looking at the shorter term, EUR/GBP has turned sharply lower since the May 12 multi-month high of 0.8621. The pair currently trades just above 0.8400 and near a cluster of prior support between 0.8384 and 0.8365. The daily chart remains positive with a series of higher highs and higher lows from early March still in place
If EUR/GBP can keep support at 0.83665 in the short-term, then the pair may well push back and eventually look to post a new higher high on a longer term outlook.