Premium Forex Watch Recap: August 20 – 21, 2024

This week, our FX strategists focused on inflation and flash business survey data, particularly from Canada and the Eurozone, for possible high-end setups.

Of the four discussions on price scenarios/outlooks this week, only one discussion saw both substantive and technical arguments triggered to become a potential candidate for a trading and risk management overlay. Check out our review of these discussions to see what happened!

Watchlists are discussions of price perspective and strategy supported by both fundamental and technical analysis, a crucial step towards creating a high quality discretionary business idea before working on a risk management and trading plan.

If you want to watch “Watch list” choose right when they are published throughout the week that you can subscribe to BabyPips Premium.

AUD/CAD 1 Hour Forex Chart from TradingView

On Tuesday, our strategists looked at the upcoming Canadian CPI report and its potential implications for the Canadian dollar. Based on our Event Guide for the CPI report, markets were expecting roughly flat-to-weak readings from previous readings. With that in mind, and looking at the potential effects of future Federal Reserve events, here’s what we thought:

“Loonie Dive” Screenplay.: If the CPI came in as expected or lower, we thought the BOC might start chasing those rate cut scissors. This could attract CAD fundamental sellers and with the RBA likely to keep interest rates high in Australia, we have been eyeing AUD/CAD as potential long strategies to watch.

“Loonie Bounce” script.: If inflation in Canada decided to be tough and come in hotter than we expected, we thought the BOC could keep those rate hikes dreamy. This could have been CAD buyers’ moment to shine, prompting them to look at CAD/CHF given the interest rate differential and if the market had broken a major support area.

What actually happened

Well folks, Wednesday is here and Canada’s CPI has decided to give us a mixed set of numbers to cloud potential future strategies and actions.

Headline CPI showed a month-on-month rebound of 0.4%, in line with expectations, but the annual reading fell from an annual increase of 2.7% in June to just 2.5% in July – the lowest ever from March 2021. Core CPI reflected a monthly increase of 0.3%, but annual core inflation fell from 1.9% to 1.7%, instead of remaining flat.

The market reacted with overall CAD weakness, an outcome that triggered our arguments for an AUD/CAD bullish bias, as cooler than expected annual inflation data increased the likelihood of a dovish BOC stance.

Market reaction

The initial market reaction was swift, with the Loonie crashing across the board. Looking at our AUD/CAD chart, we can see that the pair did indeed see an immediate rebound after the CPI release, moving up from the 0.9100 level towards the R1 pivot point at 0.9163.

However, the pair’s upward momentum was somewhat tempered by broader market dynamics. The risk-on sentiment that prevailed earlier in the week, which initially supported the Aussie, has begun to wane. In addition, progress in Israel-Hamas ceasefire talks eased crude supply concerns, putting further pressure on the oil-linked Loonie.

Interestingly, the chart shows that after the initial peak, AUD/CAD pulled back, possibly due to a repositioning ahead of the highly anticipated Jackson Hole event and possibly due to the recovery in oil prices in the second half of the week.

But by Thursday, risk-on vibes were back in play, perhaps giving more impetus to the Aussie than the Loonie as rate cut expectations rose and bond yields fell.

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

verdict

So how did I do it? In our initial discussion, we mentioned a potential pullback in the works and to “watch out for any reversal candlesticks,” primarily around rising moving averages. If this strategy has been followed, it is very likely to result in a net positive result.

But AUD/CAD rallied higher after the weak annual CPI numbers and the anticipated pullback came after the target event, so some discretion was needed as to whether or not to top or stay patient for the pullback we discussed initial.

In general, we would rate this discussion as “neutral to likely” in support of a potential positive outcome because while the strategy and outcome worked well, individual trade execution planning and decisions would have been a strong factor in the outcome.

EUR/GBP Hourly Forex Chart from TradingView

On Wednesday, our strategists set their sights on upcoming Eurozone PMI releases and their potential impact on the euro. Based on our Eurozone PMI Event Guide, markets were expecting continued divergence between weak manufacturing signals and strong updates from the services sector.

With these expectations in mind and looking at the potential effects of the recently released FOMC meeting minutes and global PMI signals, here’s what our strategists looked at:

The “Euro’s Rest” scenario:

If Eurozone PMIs showed net weakness, particularly in manufacturing, we anticipated that EUR/GBP could extend the downtrend from August. This scenario aligned with the pair’s inability to make new weekly highs above technical resistance.

The “Euro Bounce” scenario:

If Eurozone data surprised sharply to the upside, especially in services, we thought EUR/CAD could find bullish momentum after Canada’s weak annualized CPI and a break of the ascending triangle that could attract bulls technical.

What actually happened

Thursday came and Eurozone PMIs decided to serve up a mixed platter that would make even the most seasoned FX chef scratch their head.

• HCOB Flash Eurozone manufacturing PMI fell from 45.8 to an eight-month low of 45.6 in August.
• Eurozone services PMI rose from 51.9 to a four-month high of 53.3.
• France saw its manufacturing PMI fall to an eight-month low of 42.1, while services rose to a 27-month high of 55.0.
• Germany’s manufacturing PMI fell to a five-month low of 42.1, with services expanding at a weaker pace.

Meanwhile, across the Channel:

• The UK private sector expanded solidly in August.
• Manufacturing PMI rose from 52.1 to 52.5 (highest in 26 months).
• Services PMI improved from 52.5 to 53.3 (highest in four months).
• Composite PMI rose from 52.8 to 53.4 (highest since April).

Market reaction

This result triggered our fundamental arguments for a EUR/GBP bearish trend. The pair took a decisive dive following the PMI releases, breaking through multiple support levels faster than you can say “economic divergence.”

Looking at the hourly chart, EUR/GBP went through the pivot point (0.85380) like a hot knife through butter, barely pausing for breath as it broke through the S1 support levels (0.84831) and S2 (0.84550). The pair found some legs just above S3 (0.84001) but the damage was done.

The stark contrast between the weakening Eurozone manufacturing sector and strong UK PMIs gave the GBP 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 improved services PMI couldn’t compensate for.

verdict

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

The resulting move was clearly in line with our fundamental analysis for the EUR/GBP bearish trend, correctly anticipating the impact of divergent economic performances between the Eurozone and the UK.

The technical setup also played out nicely, with the pair holding the resistance levels we identified in our initial discussion before collapsing on the news.

For those who bowed low when the fundamentals and technicals were unleashed on Thursday, they likely saw a substantial upside. The strong momentum move provided more opportunities to capitalize regardless of whether traders targeted the S1 or S2 pivotal support areas.