Two trades to watch: USD/CAD, EUR/GBP

USD/CAD falls ahead of BoC rate decision

USD/CAD is heading lower ahead of the BoC interest rate decision. The central bank, which was one of the first central banks to start hiking interest rates last year, could also be one of the first to pause rate hikes.

The BoC is widely expected to raise interest rates by 25 basis points, slowing from a 50-basis point hike in December and 75 bps point hikes across the middle of last year. The move comes as inflation slows from an 8.1% post-pandemic peak to 6.3% currently. Inflation is forecast to fall to the bank’s 1-3% target range by the end of the year.

However, BoC governor Tiff Macklem will need to tread carefully and is likely to leave room for the central bank to hike rates again if necessary rather than declaring victory against inflation.

Where next for USD/CAD?

USD/CAD trades range bound ahead o the release, capped on the upside by the 50 sma at 1.35 and on the lower side by 1.3345, the 2023 low.

The recent failure to rise above the 50 sma could suggest that the recent downtrend has further to fall. This along with the RSI below 50 keeps sellers hopeful of further downside.

Sellers could look for a break below 1.3345 to expose the 100 sma at 1.3250, and the November low. A break below here could see the price test 1.32 the 200 sma, which the price has traded above since early June.

On the flip side, a rise above the 50 sma at 1.35 could open the door to 1.3680 the 2023 high and 1.37, the December high.

EUR/GBP rises ahead of German IFO business climate data

EUR/GBP is rising for a fourth straight day after more hawkish calls from ECB policymakers, receding recession fears for the bloc, and amid growing concerns over the outlook for the UK economy.

Latvia ECB policymaker, Gediminas Simkus, is the latest governing council member to support a 50 basis point rate hike at the upcoming meeting and added that the ECB should slow the pace of rate hikes as wage pressures continue to grow.

His comments come following Eurozone PMI data yesterday which showed that business activity unexpectedly returned to growth. The composite PMI rose to 50.7.

German IFO business climate data is due and is expected to add to the view that the outlook is improving, rising to 90.2, up from 88.6.

Meanwhile, the UK economy appears to be faring worse after the Office of Budget Responsibility warned that the UK’s growth prospects have deteriorated further and as government borrowing hit £27.4 billion in December, a record level.

Today PPI showed that inflation at the factory gate level cooled by more than expected to 12.4%, down from 13%.

Where next for EUR/GBP?

EUR/GBP rebounded from the 50 sma at 0.8720 and has extended gains, break above key levels. The successful defense of the 50 sma plus the bullish RSI keeps buyers hopeful of further upside.

Buyers could look for a rise above 0.8895, the 2023 high to extend gains towards 0.9, the psychological level.

On the flip side, sellers could look for a break below 0.88, the rising trendline support, which could open the door to 0.8770, the January 6 low, before exposing 0.8720, the 50 sma.  A break below here creates a lower low.