The ECB meets on Thursday for their June Interest Rate Decision meeting. Two big issues for the committee to discuss will be the continued high value of the Euro and the rise in inflation. When the committee last gave their growth and inflation forecasts, EUR/USD was near trading sub 1.2000. On June 1st, the EUR/USD was at 1.2254. Although traders would like the ECB to curtail their bond purchases under the PEPP program to pre-March meeting levels, Christine Lagarde said on May 21st that it’s too early to discus winding down the 1.85 trillion Euro PEPP program, which isn’t set to expire until March 2022. GDP and inflation forecast will also be watched. Also note that much of the EU is still under some type of Covid restrictions, with many not expected to be lifted until July 1st. The ECB will not want to reduce asset purchases too soon.
The BOC also meets this week, on Wednesday. The decision as to whether to taper or not will be more difficult for the BOC than the ECB. At the last meeting on April 21st, the BOC reduced bond purchases from C$4 billion to week to C$3 billion per week. However, with a string of 2 months of weaker than expected employment data, the BOC will have to determine if the labor force is strong enough to allow for continued tapering. Bank of Canada Governor Macklem recently said that tapering was the right move for the economy. However, also note that since the April 21st meeting, USD/CAD has fallen from 1.2490 down to 1.2070. The strength in the Canadian Dollar would reduce chances of a taper, as the BOC waits to see if the Canadian Dollar can pull back a bit. The price of crude oil is higher as well. It wouldn’t be a surprise if the BOC held off on tapering until the next meeting to see if the employment situation picks up.
EUR/CAD had been moving lower in an orderly channel since July 31st, 2020 and finally broke below in early March. After a bounce and retest of the bottom line of the channel, price fell precipitously as the Bank of Canada on April 21st when the Bank of Canada cut back bond purchases. In early May, EUR/CAD took out the March lows near 1.4736 and began consolidating in a pennant formation. The target for a pennant is the length of the pennant pole added to the breakdown point. In this case the target is near 1.4134.
Source: Tradingview, FOREX.com
On a 240-minute timeframe, although EUR/CAD has broken lower beneath the pennant, except for a few days, the pair is consolidating between 1.4645 and 1.4825 since the beginning of May. Horizontal support is at the channel low (green) near 1.4645 and then the May 12thlows near 1.4583. If price breaks below, it can fall to the February 2020 lows near 1.4267 (see daily). Lots of resistance on the upside as the upward sloping, bottom trendline of the triangle provides the first level, near 1.4760. Less than 100 pips higher is the next resistance level at the downward sloping, top trendline of the triangle, near 1.4805 and then the top channel trendline (green) near 1.4824.
Source: Tradingview, FOREX.com
With the BOC meeting on Wednesday and the ECB on Thursday, there is plenty of opportunities for volatility in EUR/CAD. If the BOC continues with tapering while the ECB remains dovish, EUR/CAD may very well be on its way towards the pennant target of 1.4134!