EUR/USD hints at 1.07 swing high, USD/CAD steady pre BOC: European open

Asian Indices:

• Australia's ASX 200 index fell by -3.7 points (-0.05%) and currently trades at 6,853.20
• Japan's Nikkei 225 index has risen by 310.98 points (1%) and currently trades at 31,372.40
• Hong Kong's Hang Seng index has risen by 200.06 points (1.18%) and currently trades at 17,191.59
• China's A50 Index has risen by 63.9 points (0.55%) and currently trades at 11,754.19

UK and Europe:

• UK's FTSE 100 futures are currently up 8.5 points (0.11%), the cash market is currently estimated to open at 7,398.20
• Euro STOXX 50 futures are currently up 2 points (0.05%), the cash market is currently estimated to open at 4,067.37
• Germany's DAX futures are currently up 14 points (0.09%), the cash market is currently estimated to open at 14,893.94

US Futures:

• DJI futures are currently up 38 points (0.11%)
• S&P 500 futures are currently down -9.5 points (-0.22%)
• Nasdaq 100 futures are currently down -62 points (-0.42%)

AUD/USD and NZD/USD were the strongest currency majors in Wednesday’s Asian session, as Australian inflation data came in much hotter than expected in both their quarterly and monthly reports.

If had to sum the Q3 inflation report up in one word, it would be “oops”. The RBA minutes and Governor Bullock made it clear that the RBA will not hesitate to hike if inflation moves toward its target too slowly. But the quarterly CPI numbers are simply pointing the wrong way. And that means the RBA’s November meeting is likely to be live, with the cash rate being hiked to 4.35% alongside a hawkish statement.

China’s equity markets posted a mediocre rally after Xi Jinping increased support for the economy via a budget revision. The fact that around half of the initial gains were handed back suggests investors remain unconvinced it will be sufficient to support growth towards their 5% target.

We saw the DAX rose in line with Tuesday’ bias and shows the potential to head for the 15k level where it may meet resistance. Weak PMI data across Europe added to the expectations that the ECB are done with tightening, ahead of Thursday’s meeting. The divergence between US and European PMIs was also the ideal catalyst to send EUR/USD lower from the 1.070 resistance cluster highlighted earlier in the week.

Events in focus (GMT+1):

• 09:00 – German Ifo business sentiment
• 13:00 – US building permits
• 15:00 – BOC interest rate decision, Governor Macklem speaks
• 21:35 – Fed chair Jerome Powell speaks

The German Ifo business sentiment report is scheduled for 09:00, where any signs of further weakness could suppress oil prices – if not help them break lower for a fourth day. As outlined in today’s Asian open report, I suspect oil has further downside potential towards $80 (if not $75) although I’d like to see a bounce from current levels to improve the reward to risk ratio.

The Bank of Canada are likely to hold their interest rate at 5%, given headline CPI and their preferred inflation measures all softened in September. This reversed earlier bets that the BOC may have to hike, so the question today is whether they’ll tip their hat to a peak rate in the statement or the press conference after its release. It is worth noting that large speculators have increased their gross-short exposure to CAD futures over the past three weeks. So the bigger surprise would be if the BOC don’t hike as expected.

1-day implied volatility for EUR/USD is around 200$ of its 20-day average ahead of Jerome Powell’s speech at 21:35 BST (06:35 AEDT Thursday). But I suspect this is over-estimating the potential for volatility, given the Fed are on a blackout period and Jerome is making opening remarks for a public event. And whilst Christine Lagarde speaks at 13:15 BST, she does not have a reputation for spilling any policy beans on the eve of an ECB decision.

EUR/USD technical analysis (1-hour chart):

Tuesday saw EUR/USD rally straight into the 1.07 resistance zone before momentum reversed swiftly lower. It is possible this marks the end of a 3-wave retracement, give the day closed with a bearish engulfing day – which formed the final candle of a 2-day bearish reversal.

The 1-hour chart shows the decline was in a relatively straight line, although prices are trying to lift themselves up from their lows. As always, I’m looking for some further mean reversion (higher) before reconsidering shorts, to increase the potential reward to risk ratio for a short.

A high-volume node formed around 1.0612 during its last decline, and such areas can ac as a magnet for prices. And as we have the daily pivot point at 1.0625 and the weekly R1 near 1.064, the 1.0625 – 1.0640 could mark a resistance zone for bears to consider fading into.

USD/CAD technical analysis (daily chart):

Whilst price action on USD/CAD has been choppy of late, it remains in an uptrend and it formed a bullish engulfing candle as a key support zone on Tuesday. With the BOC potentially delivering a dovish hold later today, USD/CAD may be able to extend it lead at least modestly and head towards 1.38 or 1.3850. As large speculators have been increasing their bearish exposure to CAD futures in recent weeks, I’m on the assumption that a dovish hold by the BOC today could squeeze some extra juice from this bullish move. But as we’re approaching the YTD high, I’d prefer to focus on the modest target of 1.38. And any pullbacks within yesterday’s range ahead of the meeting may be able to increase the reward to risk ratio for bulls.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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