EUR/USD, USD/CAD Analysis: European open – 10th July 2023

Asian Indices:

• Australia's ASX 200 index fell by -19 points (-0.27%) and currently trades at 7,023.30
• Japan's Nikkei 225 index has fallen by -25.26 points (-0.08%) and currently trades at 32,353.39
• Hong Kong's Hang Seng index has risen by 83.7 points (0.46%) and currently trades at 18,449.40
• China's A50 Index has risen by 61.41 points (0.49%) and currently trades at 12,503.18

 

UK and Europe:

• UK's FTSE 100 futures are currently down -6 points (-0.08%), the cash market is currently estimated to open at 7,250.94
• Euro STOXX 50 futures are currently down -10 points (-0.23%), the cash market is currently estimated to open at 4,226.60
• Germany's DAX futures are currently down -6 points (-0.04%), the cash market is currently estimated to open at 15,597.40

 

US Futures:

• DJI futures are currently down -40 points (-0.12%)
• S&P 500 futures are currently down -8.25 points (-0.19%)
• Nasdaq 100 futures are currently down -41.25 points (-0.27%)

 

 

• Equity markets were mixed during the Asian session, with China’s markets leading the way on hopes of more economic stimulus following another deflationary report form the world’s second largest economy
• Weak demand saw factory prices in China fall at their fastest pace in over seven years at -5.4% y/y and CPI come in flat at 0% y/y, helping USD/CNH to rise around 0.2%
• The Nikkei fell to a 4-week low before recouping earlier losses and is on track to form a Doji (indecision candle) which hints at a cycle low
• The DAX fell over -4.5% between last week’s high to low, but early signs of stability were found on Friday with a small bullish candle
• However, the DAX closed beneath the 50-day EMA and May low but remains above the December 2023 trendline, so we expect cautious trade around the cycle lows, even though last week’s selloff lost some of its ferocity on Friday 

 

Much of the price action among FX majors during the Asian session was dedicated to retracing against Friday’s moves. And the theme on Friday was a weaker US dollar following a soft headline nonfarm payrolls print, even though most other economic data points justify a more hawkish Fed. Sure, NFP came in ~200k and below expectations and the previous print, but unemployment is a very healthy 3.6% and ADP employment added close to half a million jobs whilst job layoffs were also lower.

The majority of daily ranges for FX majors are below 55% and 1-day implied volatility is also below historical volatility levels which warns of a quieter start to the week.

Whilst we have three Fed members speaking overnight, one has to question how relevant it is given FOMC minutes were more hawkish than expected and data since the Fed’s last meeting justifies higher interest rates.

 

• EUR/GBP fell back towards (but held just above) the June low last week, but two Doji’s near the cycle lows on Thursday and Friday warns of the potential for a corrective bounce higher against its bearish daily trend
• GBP/USD is pulling back from Friday’s highs, but the strong bullish structure of the daily chart favours a breakout above the June high and move towards the 1.30 handle
• USD/JPY has managed to lift itself higher from Friday’s lows above the 142 handle, yet not even recoup half of Friday’s 200-pip decline. As mentioned in this week’s COT report, we suspect a correction is now underway having reached 145 with net-long exposure sitting at a likely sentiment extreme
• Gold is trading within a choppy range between 1900 – 1940, which makes it preferable for smaller hold times (intraday trading), until we see a clear breakout of its range

 

 

EUR/USD 1-hour chart:

EUR/USD has mostly been confined within the 1.0850 – 1.1000 range over the past three weeks, but the past two weeks have produced bullish closed with lower wicks, to form a double bottom around 1.0836. Another crack at 1.1000 seems achievable given it trades less than 40 pips from the big round number, but we’d prefer to see a retracement before reconsidering longs to help increase the potential reward to risk ratio.

The daily chart shows a bullish engulfing candle formed on Thursday around the 50-day EMA ahead of Friday’s rally, and prices have remain within a tight range near the highs overnight. An initial move lower seems likely (and desirable) from current levels, at which point we would seek evidence of a swing low in an intraday timeframe around a support level.

Potential support levels include a volume cluster around 1.098, the daily / weekly pivot points around 1.0923 – 1.0935, or the 1.0900 handle near the daily S1 pivot.

 

USD/CAD daily chart:

A bearish hammer week formed on USD/CAD just beneath the 1.34 handle, and a prominent bearish engulfing candle formed on Friday thanks to a strong Canadian employment report. This has seen odds sway in favour of a 25bp hike from the BOC this week, but leaves the debate open as to whether it will a ‘one and done’ or a hawkish hike is delivered.

Technically, it appears as though USD/CAD has formed a three-wave correction against the preceding move, which may have completed around the 50% retracement level and 50-day EMA. Prices have drifted higher during Asian trade, but bears could consider fading into any low volatility retracements within Friday’s range to see if momentum turns lower as part of a swing trade short. The initial target could be the June low, a break beneath which brings the 1.30 handle in to focus. And a softer-than-expected US inflation report this week, coupled with a hawkish 25bp hike from the BOC could certainly help the bear camp.

 

 

 

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge