Premium Forex Watch Recaps: Aug. 20 – 21, 2024

Our currency strategists this week focused on inflation data and flash business surveys, particularly from Canada and the Eurozone for potential high-quality setups.

Of the four scenario/price outlook discussions this week, It can be said that only one discussion saw both fundamentalist and technical arguments raised. To become a potential candidate for Trade and Risk Management. Check out our review of these discussions to see what happened!

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On Tuesday, our strategists were watching the upcoming Canadian CPI report and its potential implications for the Canadian dollar. Based on the CPI event guide, markets were expecting a similar to weaker-than-expected number compared to previous readings. With that in mind and considering the potential implications of upcoming Fed events, here’s what we were thinking:

“Canadian Dollar Diving” ScenarioIf the CPI comes in as expected or lower, we would expect the Bank of Canada to start targeting interest rate cuts. This could attract primary CAD sellers, and with the RBA likely to keep interest rates high in Australia, we have been watching the AUD/CAD pair as a potential long-term strategy.

“Canadian Dollar Recovery” ScenarioIf Canada’s inflation growth decides to be strong and delivers better than expected, we thought the BoC might keep the dreams of a rate hike alive. This could be a good time for the Canadian dollar bulls to shine, prompting a look at the CAD/CHF pair given the interest rate differential and if the market breaks through a key support area.

what really happened

Well, ladies and gentlemen, Wednesday has come, and the Canadian CPI has decided to give us a mixed bag of numbers that will cloud our potential strategies and actions going forward.

The headline CPI showed a 0.4% monthly rebound as expected, but the annual reading fell from a 2.7% year-on-year increase in June to just 2.5% in July — its lowest reading since March 2021. The core CPI reflected a 0.3% monthly rise, but annual core inflation fell from 1.9% to 1.7% instead of holding steady.

The market responded with broad-based weakness in the Canadian dollar, an outcome that reinforced our argument for a bullish bias in the AUD/CAD pair, as weaker-than-expected annual inflation data increased the chances of a dovish BoC stance.

Market reaction

The initial market reaction was swift, with the Canadian dollar falling broadly. Looking at the AUD/CAD chart, we can see that the pair actually saw an immediate rebound after the CPI release, rising from the 0.9100 level towards the R1 pivot point at 0.9163.

However, the pair’s upward momentum was moderated somewhat by broader market dynamics. Risk sentiment that had initially supported the Australian dollar earlier in the week began to ease. Additionally, progress in ceasefire negotiations between Israel and Hamas eased concerns over crude oil supplies, adding pressure to the oil-linked Canadian dollar.

Interestingly, the chart shows that after the initial rally, the AUD/CAD pair retreated, possibly due to some repositioning ahead of the highly anticipated Jackson Hole event, and possibly due to the recovery in oil prices in the latter half of the week.

But by Thursday, the risk sentiment was back in play, giving more support to the Australian dollar than the Canadian dollar as expectations of rate cuts rose and bond yields fell.

By the end of the week, the AUD/CAD pair was hovering around the 0.9180 level, having broken above the R1 pivot point (0.9163) but still below the R2 level (0.9212) that we had identified.

The verdict

So, how did we perform? In our original discussion, we mentioned the possibility of a pullback and “looking for any reversal candles,” primarily around rising moving averages. If this strategy is followed, it is very likely to result in a net positive outcome.

But the AUD/CAD pair rose sharply after the weak YoY CPI figures, and the expected pullback came after the target event, so some judgment was needed on whether to go with the sudden spike or remain patient and wait for the pullback we originally discussed.

total, We rate this discussion as “neutral to likely” in support of a possible positive outcome. Because the strategy and the result were successful, Planning the execution of individual trades and making decisions were strong factors influencing the outcome.

On Wednesday, our strategists focused their attention on the upcoming Eurozone PMI releases and their potential impact on the euro. Based on our Eurozone PMI event guide, markets were expecting a continued divergence between weak manufacturing signals and strong service sector updates.

With these expectations and given the potential implications of the recently released FOMC minutes and global PMI signals, here is what our strategists were looking at:

Euro Failure Scenario:

If Eurozone PMIs show net weakness, especially in manufacturing, we could expect EUR/GBP to extend its downtrend that started in August. This scenario has been consistent with the pair’s failure to post fresh weekly highs above technical resistance.

“Euro Recovery” Scenario:

If Eurozone data surprises to the upside, especially in the services sector, we might think that EUR/CAD could find some upward momentum after a weak annual CPI reading from Canada, breaking the ascending triangle that could attract technical bulls.

what really happened

It’s Thursday, and the Eurozone PMIs have decided to serve up a mixed bag that will leave even the most seasoned FX chefs scratching their heads.

• The HCOB Flash Manufacturing Purchasing Managers’ Index (PMI) for the eurozone fell from 45.8 to an eight-month low of 45.6 in August.
• The Eurozone services PMI rose from 51.9 to a four-month high of 53.3.
• France’s manufacturing PMI fell to an eight-month low of 42.1, while the services index jumped to a 27-month high of 55.0.
• Germany’s manufacturing PMI fell to a five-month low of 42.1, as the services sector expanded at a weaker pace.

Meanwhile, across the channel:

• The UK private sector showed strong expansion in August.
• The manufacturing PMI rose from 52.1 to 52.5 (a 26-month high).
• The services PMI improved from 52.5 to 53.3 (a four-month high).
• The composite PMI rose from 52.8 to 53.4 (the highest level since April).

Market reaction

This result has brought to light our fundamental arguments for a bearish EUR/GBP pair. The pair fell decisively in the wake of the PMI release, breaking multiple support levels faster than what we would call “economic divergence.”

Looking at the 1-hour chart, EUR/GBP broke through the pivot point (0.85380) like a hot knife through butter, barely pausing to catch its breath as it crashed past the S1 (0.84831) and S2 (0.84550) support levels. The pair found some stability above S3 (0.84001), but the damage was done.

The stark contrast between weak eurozone manufacturing and broadly strong UK PMIs gave sterling bulls all the ammunition they needed. Add to that ECB official Olli Rehn’s comments about slowing inflation and economic weakness in the eurozone, and you have a recipe for euro weakness that even the improving services PMI couldn’t offset.

The verdict

So how did our strategy discussion go? Well, it was more accurate than a pencil trader on NFP day. We rate this discussion as “highly likely” to support a possible positive outcome.

The resulting move was clearly consistent with our fundamental analysis of the bearish bias in EUR/GBP, as it correctly anticipated the impact of divergent economic performance between the Eurozone and the UK.

The technical setup also played a nice role, as the pair respected the resistance levels we identified in our original discussion before the sharp drop due to the news.

For those who were bearish when the fundamental and technical arguments were raised on Thursday, they likely saw a big positive outcome. The strong momentum move presented multiple opportunities to take advantage of, whether traders were targeting the S1 or S2 pivot support areas.