Macroeconomic overview

Speculators turned bullish on the CAD last week for the first time since September, data from the Commodity Futures Trading Commission and Reuters calculations showed. Canadian dollar positions swung to net long 2,519 contracts as of January 24 from net short 5,456 contracts a week earlier. The loonie rose 1.3% last week as investor fears of a more unfavorable trade outlook for Canada abated and after U.S. President Donald Trump signed orders on Tuesday smoothing the path for the Keystone XL oil pipeline.

The USD/CAD recovered slightly at the end of the week. The CAD weakened as oil fell and investors braced for a speech by Bank of Canada Governor Stephen Poloz scheduled for Tuesday. The market expects him to retain his dovish commentary and try to talk the currency down. No dovish hint from Poloz is likely to support the loonie.

The market is also looking forward to Tuesday’s Canadian GDP data. In the second half of this week the most important event for the USD/CAD will be the Fed statement.

Technical analysis

The USD/CAD recovered to the resistance at 1.3163 (38.2% fibo of May-December rise). The pair is also still below the 7-day exponential moving average, which suggests that recent upward move is not a reason to change the trading strategy. Fundamentals will play key role this week (Poloz speech, Fed statement). If the USD/CAD gets no additional fuel from surprisingly dovish Poloz (Tuesday) or hawkish Fed (Wednesday), it may fall to at least 1.3000 at the end of this week.

Trading strategy

The target of our short-term target remains at 1.3030. Our profit on this position is locked in at 1.3180, slightly above the key resistance levels.  Our long-term view is bearish.

EUR/GBP: Fed and BOE will set the direction

Macroeconomic overview

The Bank of England will simultaneously publish the February Inflation Report, the MPC policy decision and the MPC minutes on Thursday. We expect the Committee to vote unanimously to keep the stance of monetary policy unchanged.

The BoE is widely expected to revise up its short-term growth and inflation forecasts following reassuring recent UK data, but the uncertainty surrounding soon-to-start Brexit negotiations is expected to keep it cautious.

Governor Mark Carney, in a speech on January 16, cautioned that developments since the Brexit vote may require a more hawkish monetary policy. He said, “Recently, there have been signs of continued solid consumer momentum domestically and a stronger growth outlook globally. The MPC will monitor developments in the light of its inflation tolerance, and will explain its assessment and policy stance accordingly.”

We do not think the BoE inflation report will be a big shock. It may sound a bit more hawkish but we do not expect a clear hint at the possibility of tighter policy.

Technical analysis

The EUR/GBP has not broken the support at 0.8450, but is still below 7-day exponential moving average, which gives no clear short-term outlook from the technical analysis point of view. A close above 0.8550 would be a stronger signal that recent GBP rally is over.

Trading strategy

We expect the BOE to remain cautious on Thursday despite upwardly revised inflation and growth forecasts. That is why any increases in the GBP may be limited. On the other hand, the Fed is unlikely to signal timing of its next hike on Wednesday, which may strengthen the EUR across the board. We have placed EUR/GBP bid at 0.8480, but this strategy may be relatively risky.

TRADING STRATEGIES SUMMARY:

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