With two major central bank statements released this week, it was easy for forex strategists to focus on the Canadian dollar and the euro this week as the key markets to watch.
Among the four scenario/price forecast discussions, The two arguably saw both financial and technical arguments raised To become a potential candidate for a risk management overlay. Check out our review of that discussion to find out what happened!
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Australian Dollar/Canadian Dollar 1 Hour Forex Chart by TradingView
On Tuesday, the upcoming monetary policy statement from the Bank of Canada was the first catalyst to focus on, and it is the event that always sends the Canadian dollar into action once the statement is released.
In our event guide to the Bank of Canada statement, we noted that the market was very confident of a rate cut from the Bank of Canada, which was supported by recent Canadian CPI readings that have been below estimates for four straight months. But we also noted that leading indicators were pointing to a recovery in inflation rates, clouding the event's outcome prospects a bit.
Overall, though, the odds favored a scenario where the event would be bearish for the CAD, and in this case we saw potential long biased setups on AUD/CAD, discussing bullish breakout price action and pullbacks around the event.
Now, if an event surprises the markets and turns out to be neutral to hawkish for the CAD (e.g. strong rhetoric on flat inflation; openness to raising interest rates again, etc.), then we take a look at the settings on the EUR/USD pair. / Canadian dollar potential short-term CAD plays out in this scenario.
As expected, the Bank of Canada cut interest rates by 25 basis points on Wednesday, and the statement immediately sparked a selling reaction from forex traders. This rally in the AUD/CAD pair was limited to the first 15-minute candle and reversed, with traders likely taking profits ahead of the Bank of Canada press conference.
At the press conference, Bank of Canada Governor Tiff Macklem shared his openness to further rate cuts, but also said the Bank of Canada “We will make our decisions on interest rates one meeting at a time.He also commented on the extent to which the Bank of Canada's interest rates could diverge from the United States, but “they're not.”Close to that border” at the moment.
His comments were measured and arguably quite neutral, which is probably why we saw the Canadian dollar recover during his appearance. But they were not strong enough to cover up the fact that the Bank of Canada (BOC) is likely to move away from restrictive policy in the future, making it a net pessimistic outcome and essentially triggering our long AUD/CAD bias.
Following the Bank of Canada event with the closely watched Canadian jobs report, the AUD/CAD spent most of the time above post-press conference prices (around 0.9095), raising the odds that this discussion will be supportive of a net positive outcome. The pair has already seen two rallies from that area, giving traders multiple opportunities to exercise this fundamental bias.
But on Friday, the Commerce Department's decisions could have been a big factor in the outcome. The upcoming Canadian employment update was just around the corner to trigger significant volatility in the Canadian dollar, and depending on whether the trader managed the position to lock in profits/minimize risk or not, would have changed the outcome dramatically given the reaction to the positive jobs headline. Sudden/higher color spike.
Overall, given that AUD/CAD spent most of the week above BOC event prices, we say this discussion is “likely” supportive of a positive outcome, but will depend heavily on risk management/trade decisions on Friday before the key election. The event is from Canada.
EUR/USD for 1 hour Chart by TradingView
On Wednesday, the upcoming monetary policy statement from the European Central Bank was the second catalyst we chose to focus on,
In our event guide to the ECB statement, we discussed the high (and long-held) expectations for a rate cut, but with signs of green shoots emerging from the Eurozone's leading indicators in recent months, we were also likely to see rhetoric suggesting… Beware of cutting interest rates too aggressively.
Therefore, the market's reaction will likely hinge on the ECB's press conference, with traders watching for any signs of a strong conviction that a cut in July or September is justified as the main signal of a continued downward trend for the euro. In this cautious scenario, we view EUR/JPY as a way to express a bearish EUR bias given recent signals that the Bank of Japan will reduce its bond purchasing program at some point soon.
In the event that the ECB plays down future cuts and the euro rises based on this rhetoric, we cast a long bias on EUR/USD as this market will likely attract buyers in this scenario, given the disappointing early jobs readings from the US. United States until then. a point.
As expected, the European Central Bank cut interest rates by 25 basis points on Thursday, triggering an immediate rise in the euro, partly due to a “buy the rumour, sell the news” reaction, but perhaps also a reaction to… The ECB raised economic growth and inflation forecasts as well, which contradicts expectations/hopes for further interest rate cuts in the future.
The ECB press conference was quickly followed by ECB Governor Christine Lagarde's comment on forward guidance on policy moves, which overall did nothing to strongly suggest against their improved outlook. We viewed this as a “hard sell” result, which triggered our long-term biased EUR/USD discussion.
In the wake of the event, the EUR/USD pair rose, but volatility was limited, likely due to traders remaining outside the range ahead of the always-awaited monthly update on the US government's employment situation just one day ahead.
This massive event has made trade/risk management a crucial element as to whether or not this discussion will lead to a net positive outcome, and for those who longed for EUR/USD after the ECB event and took profits ahead of the non-farm payrolls data In the US, they would probably do well. With small gains.
But for those who bet on one of the most volatile events each month and stuck to long positions, it is very likely that they will do very poorly in this discussion.
So overall, we rate this discussion as 'Neutral' in its potential support for a positive outcome given the lower volatility following the ECB event, and the large factor or risk management/trade decisions going into the US jobs update.
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