This week our strategists focused on Eurozone business surveys and the Bank of Canada interest rate statement, which led our strategists this time to focus on the Euro and Canadian Dollar.
Of the four scenario/price outlook discussions this week, It can be said that both discussions witnessed the raising of fundamental and technical arguments. To become a potential candidate for Trade and Risk Management. Check out our review of this discussion to see what happened!
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EUR/GBP currency pair 24 hours Chart by TradingView
On Tuesday, Babypips strategists focused on Upcoming Eurozone PMIsWith a side of possible optimism about British business sentiment regarding flavour. Here’s what we were thinking:
Euro Failure Scenario: If the Eurozone PMIs show that the manufacturing sector is still stuck in reverse and the services sector is losing its charm, we would imagine that the EUR/GBP currency pair could fall faster than a tourist on a London sidewalk, especially if the UK PMIs come out relatively better than the Eurozone PMIs.
“Euro Recovery” Scenario: If Eurozone data surprises to the upside on net income, we could expect EUR/NZD to rally due to the broader risk-on sentiment and the recent relative weakness of the NZD as Asia’s biggest powerhouse, China, shows signs of weakness.
What exactly happened?
Well, gentlemen, Wednesday has come, and the Eurozone PMIs have decided to throw us a little curveball that would make even the best cricketers jealous.
- Eurozone Manufacturing PMI: 45.6 (46.0 expected, 45.8 previously)
- Eurozone Services PMI: 51.9 (F 52.9, Previous 52.8)
Meanwhile, across the channel:
- UK Manufacturing PMI: 51.8 (51.1 expected, revised to 50.9)
- UK Services PMI: 52.4 (FX: 52.5, previous revised to 52.1)
Eurozone figures were mixed, like a handful of jelly beans where you can’t be sure whether they’re fruit flavoured or earwax flavoured. Manufacturing was weaker than expected, but services managed to keep its head above water, albeit with difficulty.
On the other hand, the UK decided to show its resilience, with manufacturing surprising the market with its rise, and services remaining stable. It’s like ordering a full English breakfast while the eurozone is stuck eating continental food.
Market reaction
This result sparked our arguments for a bearish bias in EUR/GBP, which immediately fell during the session, dropping by about 20 pips before finding buyers between 0.8390 – 0.8400.
There was during the afternoon session in the US where risk sentiment in general turned strongly negative, likely due to the massive sell-off in US stocks, sending the EUR/GBP pair higher again faster than you can say “God save the King.”
By the end of the week, EUR/GBP was hovering around the .8425 level, sandwiched between our pivot points R1 (.8439) and P (.8411) like a tourist stuck between Buckingham Palace and Big Ben.
The verdict
So how did our crystal ball turn out? Well, it was about as accurate as the UK weather forecast – we got some parts right, but missed a few showers along the way. Our fundamental analysis was spot on, with Eurozone PMIs showing some weakness indeed. However, we underestimated the massive strength in broader risk sentiment as the negative risk sentiment dominated almost everything else over the past week, as we discussed in our global market summary.
Overall, we rate this discussion as “neutral to unlikely” in support of a potential positive outcome. For those who shorted immediately when the fundamental arguments were released on Wednesday, they had a chance to see a positive outcome depending on the trading plan chosen and how it was executed.
But for those who sold after Wednesday’s US session and into Friday’s Asian session, they likely got caught up in the broader risk-on atmosphere (which almost always benefits the euro at the expense of the pound) and likely saw a net negative result in the end.
EUR/CAD currency pair 24 hours Chart by TradingView
On Wednesday, our strategists focused on the upcoming Bank of Canada (BOC) monetary policy statement, while keeping an eye on Eurozone PMIs and broad risk volatility.
“Canadian Dollar Diving” Scenario: If the Bank of Canada cuts interest rates by an expected 25 basis points (As described in our event guide.) Hinting at more cuts to come, we expected the EUR/CAD pair to extend its uptrend faster than a hockey player taking off on a breakaway. We were looking at previous highs near 1.5000, with a potential move to 1.5050 if momentum held strong.
Falcon Cut Scenario: If the BoC rate cut comes without a downward revision to economic forecasts and/or no additional dovish rhetoric, we envisioned that CAD/CHF could break out of consolidation faster than the bears attacking the camp. We would look for a move beyond the pivot level (0.6500) with the potential to reach the first resistance level (0.6550) or even the July highs near the second resistance level (0.6620).
What exactly happened?
Well, gentlemen, Wednesday has come, and the Canadian Olympic Committee has decided to serve up a plate of French fries with white cheese that would make even the most hardened Quebecer raise an eyebrow.
- The Bank of Canada cut interest rates by 25 basis points to 4.50% (as widely expected).
- The Bank of Canada has cut its 2024 growth forecast from 1.5% to 1.2%.
- The Bank of Canada left its 2024 inflation estimate unchanged at 2.6%, but raised the 2025 estimate to 2.4% from 2.2%.
- Bank of Canada signals ‘additional cuts’ amid downside risks from oversupply
Governor Tiff Macklem did not mince words, “Downside risks are gaining increasing weight in our monetary policy deliberations,” he stressed. He went so far as to say: “If inflation continues to decline broadly in line with our expectations, it is reasonable to expect further rate cuts.” That is about as dovish as we can get without dressing up as a bird!
As discussed above, the Eurozone numbers were mixed, but arguably net negative and triggered a very short-term bearish reaction from traders.
Market reaction
This triggered our long bias on EUR/CAD, which rose sharply after the BoC event but quickly found resistance, possibly due to bearish forces on the euro during the session.
But as mentioned above, Negative sentiment towards broad-based risks has been strong over the past week.This was signaled by heavy selling across most major risk-on financial markets, with a combination of equity sector rotation and concerns about slowing macroeconomic activity among the main drivers. In this environment, the euro tends to outperform the Canadian dollar.
Overall, we give this discussion a “likely” rating to support a possible positive outcome, mainly because the market spent most of the week above the discussion price area and above the target event area. There was no need for major complexities in trade management due to the bullish momentum.
We did not rate it as “very likely” due to the weak Eurozone PMIs, which would have made it difficult to make a buy/no-buy decision at game time, and we underestimated the strength of the broad risk-off environment, which is the main reason this strategy worked.
But that’s what happens sometimes. The result you wanted comes true even if it doesn’t turn out the way you expected and vice versa (as we saw with the EUR/GBP currency pair).
All we can do is focus on finding the best probability settings and managing risk as best we can according to our expectations. With this, and with good psychology and discipline, we hope that this will lead to net positive results in the long run.