Trade Of The Week: EURCAD knocks on major resistance

• BoC/ECB combo could rattle EURCAD

• Both central banks expected to hold rates

• Keep eye on updated ECB economic projections

• EURCAD bullish on D1 but RSI overbought

• Key levels of interest at 1.4650 & 1.4750

A central bank combo featuring the Bank of Canada (BoC) and European Central Bank (ECB) may rock the EURCAD this week.

The minor currency pair has been trapped within a wide range since December 2023, with support at 1.4475 and resistance at 1.4750.

However, a bullish presence can be felt on the daily charts with prices approaching key resistance.

The EURCAD could be on the cusp of a major breakout.

Here are 3 reasons why:

1. BoC rate decision

The Bank of Canada is expected to leave interest rates unchanged at 5% on Wednesday.

Given how economic growth surprised to the upside in Q4 and inflation fell to its lowest since June 2023 at 2.9%, the BoC may not be in a rush to cut interest rates. Nevertheless, much attention will be directed towards the policy statement for more clues on the central bank’s next policy move. Interestingly, traders are pricing in only a 32% probability of a 25-basis point BoC cut by April with this jumping to 86% by June 2024.

• If the BoC signals that rates will remain higher for longer until there are more signs of cooling inflation, this may boost the Canadian Dollar.

• Should the BoC strike a dovish note and hint that a rate cut could be around the corner, the CAD may weaken – pushing the USDCAD higher as a result.

2. ECB rate decision

Markets widely expect the European Central Bank to leave interest rates unchanged on Thursday.

So much focus will be on the fresh forecasts from the ECB’s staff economists and Lagarde’s press conference for fresh clues on future policy moves. It is worth noting that inflation has edged lower in the euro area while economic data remains soft. Traders are currently pricing in a 21% probability of a 25-basis point ECB cut by April with this rising to 92% by June 2024.

• Should the ECB sound more hawkish than expected and signals the rates will remain higher for longer, the euro may jump – pushing the EURCAD higher.

• A dovish sounding ECB that confirms potential rate cuts later this year is likely to weaken the euro, dragging the EURCAD lower.

3. Technical forces

The EURCAD is respecting a bullish channel on the daily charts with prices trading above the 50, 100 and 200-day SMA. However, the Relative Strength Index (RSI) signals that prices are approaching overbought levels.

• A solid breakout above 1.4750 may spark a move higher towards 1.4850.
• Should prices slip below the 100-day SMA at 1.4650, this may open a path towards the 50-day and 200-day SMA at 1.4590.

According to Bloomberg’s FX forecast model, there’s a 77% chance that EURCAD will trade within the 1.45895 – 1.48550 range over the next week.