There were plenty of catalysts to consider this week, and our forex strategists will be focusing on the Eurozone CPI and the UK General Election to determine asset selection and biases this week.
Of the four scenario/price outlook discussions this week, Two discussions witnessed the raising of fundamental and technical arguments. To become a potential candidate for risk management. Check out our review of this discussion to see what happened!
Watchlists are discussions of price predictions and strategies backed by fundamental and technical analysis, and are a crucial step towards creating High quality business idea estimate Before working on a risk management and trading plan.
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EUR/CAD currency pair 24 hours Chart by TradingView
On Monday, we took a look at the euro to identify potential short-term setups and higher volatility with the latest eurozone CPI report due on Tuesday.
Based on our work on the Euro Area CPI Events Guide, leading indicators in the Euro Area pointed to a slowdown in consumer price growth in June.
Our idea was that if we saw Eurozone CPI in line with expectations of slower net inflation growth, we discussed potential price forecasts and scenarios in EUR/GBP, where GBP would likely outperform the EUR due to the strong selling pressure the pair has been under since May.
On the other hand, if Eurozone CPI data points to persistent inflationary growth conditions, we would look to EUR/CAD as a pair that could see gains, partly due to recent dovish rhetoric from the Bank of Canada and expectations of a weak Canadian jobs update.
Well, Eurozone consumer inflation data was mixed with the headline rate falling to 2.5% y/y from 2.6% y/y, but the core rate came in higher than expected, settling at 2.9% y/y. Given that both figures are still well above inflation targets, coupled with a very high reading for services inflation of 4.1% y/y, we see this outcome as net supportive for the euro.
The euro actually fell after the CPI release, but this was somewhat expected given the bullish behavior on Monday leading up to the event (likely due to recent downplaying of interest rate cuts by ECB officials).
After the event and initial reaction, the EUR/CAD pair slowly attracted buyers during the week, leading to a sharp rally on Friday after a weak Canadian jobs update. This event pushed the pair not only to test the first target resistance area at 1.4750, but also to close the week on a strong note for the bulls, near the week’s high at 1.4780, more than 70 pips above the Eurozone CPI result.
Overall, we believe this watchlist discussion was “likely net supportive of a potential positive outcome, given that the pair spent most of its time in a price area that was relatively favorable to our discussion and event prices, and reached our upside target.
Based on the continued rise after the initial dip, then the sudden spike, it is likely that no complex risk management/trading plan was required to reach a net positive outcome.
GBP/CHF currency pair for one hour Chart by TradingView
The UK parliamentary elections on Thursday were our next catalyst, which could lead to increased volatility in the pound.
In Babypips.com’s event guide for the UK parliamentary election, the predictions were: The result of the Labour Party’s victory, which everyone agreed was very good for the British economy. This is likely to be due to Labour’s views on increased government spending, taxing energy companies, and its relationship with the EU.
In the event of a Labour victory, we were bullish on GBP/CHF, choosing the franc due to the recent SNB rate cut and the possibility that the upcoming Swiss CPI report would indicate continued slowing inflation. We also believed that a reversal of the GBP/CHF uptrend was possible, and if so, this scenario could attract both technical and fundamental buyers into the pair.
But if the markets were surprised by a hung parliament, or a relatively weak Labor win, we would view GBP/AUD as a potential pair to attract net GBP sellers, who would likely be attracted by the surprisingly strong inflation data in Australia recently to keep speculation of an RBA rate hike alive.
Not long after we posted our GBP watchlist discussions, GBP/CHF dropped to the targeted support area (38% Fibonacci retracement / R1 pivot level), and it appeared that buyers were keen to get in, likely pricing in an expected Labour win prematurely.
The subsequent rally took the market to the key psychological level of 1.1500, where it found a top after a weaker-than-expected Swiss CPI reading (slowing to 0.0% m/m vs. 0.3% m/m previously). GBP/CHF rallied sharply during the event, but given the strong rally up to that point, profit-taking during the event seems to have been the preferred behaviour of traders, especially with the UK general election approaching.
Voting in the UK general election began on Thursday and as expected, Labour won a landslide victory on Friday. This was linked to a recent move higher in GBP/CHF but was met by sellers during the US session, which was linked to a weak US jobs update that likely raised global recession fears during the session. There are also likely to be some GBP bulls taking some profits before the week closes.
Overall, we believe the GBP/CHF watchlist discussion was “most likely” supportive of a potential net positive outcome. Our discussion of the potential support zone, our Swiss CPI forecast, and the UK general election events went as expected, leading GBP/CHF to move in our biased direction.
One of the key factors influencing the outcome of the trade was whether a proactive long position move was made immediately after the price reached the targeted support area or whether the risk manager waited until the event occurred before taking the risk. If that was the case, he would certainly not have taken any action.
But for those who have taken a long-term decision at the Fibonacci indicator, the outcome is very likely to be positive given the strong upside at each of the target triggers, as long as the necessary profit-taking/risk-reduction adjustments are made after the target triggers have passed.
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