GBP/USD – Fails Below 1.40, Is 1.37 Next

GBP/USD – Fails Below 1.40, Is 1.37 Next

Chart Of The Day

GBP/USD – Fails Below 1.40, Is 1.37 Next

After seven straight days of gains, we’ve finally seen a pullback in sterling. It took a softer retail sales report to turn the currency around as GBP/USD tried to make a run for 1.40. Over the past month, we seen significant gains and while we believe there will be further gains in 2018, the currency pair is due for a correction. Prime Minister May received the votes she needed to approve the key European Union (withdrawal) Bill and despite European Commission President Juncker’s hope that Brexit will be reversed, 2018 will be the year that a deal gets done. The Spanish and Dutch have already thrown their support behind a soft Brexit and UK officials will be operating under that assumption. In the meantime, as debates and negotiations continue, UK data has taken a turn for the worse with consumer price growth slowing year over year and retail sales taking a nosedive in the month of December. Excluding auto purchases, retail sales experienced its largest decline in 7 months. This does not bode well for next week’s fourth quarter GDP report as spending slowed in the last 3 months of the year. UK labor market data is also due for release and investors will be eager to see if wage growth also weakened. The prospect of softer wage data (after last month’s strong rise) leads us to believe that GBP/USD could slip down to 1.37.

Technically, the GBP/USD rally stopped short of the 38.2% Fibonacci retracement of the 2014 to 2016 decline. Right now there’s still a series of higher lows and higher highs but if GBP/USD breaks below 1.38, we could see a deeper correction that takes the pair to at least 1.37 and possibly even to the 20-day SMA near 1.36. However if 1.3950 is broken, the next stop will be 1.40 at which point, the big battle begins.

Is GBPUSD Headed for 1.40?

Chart Of The Day

Sterling rose to its strongest level since June on the back of U.S. dollar weakness and the prospect of a soft Brexit. On Friday, there were reports that the Spanish and Dutch support a soft Brexit that keeps Britain more closely tied with the rest of the region. The EU Parliament is also looking to soften proposals on the forced relocation of clearing houses, reducing the risk that the UK might lose such lucrative business. We’ve said it before – 2018 will be the year that a Brexit deal gets done and these are all signs that progress is being made. With that in mind, next week, Parliament will debate Brexit on January 16 and 17th, so keep an eye out for market moving headlines. Sterling will be in play with UK inflation and retail sales data scheduled for release.

Although we are looking for both reports to surprise to the downside, on a technical basis, there’s no major resistance in GBP/USD until the 38.2% Fibonacci retracement of the 2014 to 2016 decline near 1.3975. The trend is strong and further GBP/USD gains are likely.

USD/CAD Will Test 1.40 Again

Chart Of The Day

USD/CAD Will Test 1.40 Again

One of the best performing currencies this year is USD/CAD, which climbed more than 15% to a 12 year high. We have not seen the Canadian dollar this cheap since 2004 and there’s no doubt that its weakness reflects the underperformance of Canada’s economy. The biggest problem for Canada has and will continue to be oil. The price of oil is down 30% in the last 12 months and 60% in the last 18 months. Since economic data is released with a lag, we will continue to see the aftermath of lower oil prices in early 2016. The market is only pricing in a 25% probability of easing by March but we believe that the odds will grow as the year progresses. With many analysts calling for WTI crude to drop to as low as $20 a barrel in 2016, USD/CAD will not only test but also break 1.40 in the coming year. Oil supply and demand remain major problems for Canada’s largest industry and with no respite in sight, we expect the Bank of Canada to lower interest rates again on the back of weaker data.

Taking a look at the daily chart, USD/CAD is already attempting to rise above the first standard deviation Bollinger Band. Any dip towards 1.38 should be seen as a buying opportunity. We need to turn to the monthly chart to find resistance for USD/CAD. Right now the 12 year high of 1.40 is the most important resistance level. When this level is broken, the next important level will be 1.43, a level the currency pair broke down from in 2003, found support in 2000 and resistance at in 1995.

USDCAD at 1.40 -How Much More?

USDCAD at 1.40 -How Much More?

Chart Of The Day Uncategorized

On Friday USD/CAD took out multi-decade highs, hitting the 1.4000 level as oil prices continued to collapse. The market is now pricing the prospect of recession in the great white north and traders are bracing themselves for a string of possible bankruptcies in the extraction sector as commodity prices drive producers out of business.

In addition to that BOC governor Polosz has floated to idea of negative interest rates in order to stimulate the moribund economy. However sentiment on the loonie has reached such negative territory that the pair is very vulnerable to a big short squeeze and next week Canada reveals it GDP and Retail Sales figures. If the numbers don’t look too bleak and if crude is able to stabilize the pair could actually see a drop towards 1.3700 level as profit taking kicks in

EUR/CAD Headed Back to 1.40

EUR/CAD Headed Back to 1.40

Chart Of The Day

Fundamentals

From a fundamental and technical perspective, we believe EUR/CAD is headed back down to 1.40. The euro was hit hard today by the talk of corporate bond buying by the European Central Bank. If true it would be another step by the ECB to increase stimulus. Corporate bond buying is complex and difficult to implement but the mere fact that this is a possibility reinforces the central bank’s bias to ease. The euro is in play this week with the PMI reports scheduled for release on Thursday and the bank stress tests results due on October 26. Given the recent deterioration in Eurozone data, we expect the PMI reports to show a further slowdown in economic activity that should keep pressure on the euro. At the same time, tomorrow’s retail sales report and Bank of Canada rate decision should be positive for the CAD. The loonie has become deeply oversold due to the decline in oil prices but based on the uptick in job growth, increase in core prices and weakness of the exchange rate, the statement could be less dovish, leading to a much needed reversal in USD/CAD. Canada is widely expected to raise rates after the Fed and before the BoE, which makes the CAD a bargain against the euro.

Technicals

The 1% decline in EUR/CAD on Tuesday is a reflection of significant weakness for the currency pair. However according to the weekly chart shown below, the key level to watch is 1.4265, the 38.2% Fibonacci retracement of the 2012 to 2014 rally. If this level is broken in a meaningful way and it appears that it will, the next main area of support is 1.40. On the upside, 1.45 is resistance.

EUR/JPY – Gunning for a Break of 140

EUR/JPY – Gunning for a Break of 140

Chart Of The Day

EUR/JPY – Gunning for a Break of 140

Fundamentals

From a fundamental and technical basis, it should only be a matter of time before EUR/JPY breaks above 140. Considering that the currency pair ended Friday’s session only 10 pips or so away from this level it won’t take a stretch of the imagination to believe that at bare minimum a test and most likely a break of this level will occur. However it is not just the proximity of this level that has us convinced that the currency pair will not only breach 140 but make a run for 141. First and foremost, EUR/JPY is traditionally the quintessential risk on trade, which means that when stocks do well, EUR/JPY should rally. However even though U.S. stocks have climbed to record highs, we have seen a very limited up move in EUR/JPY and a lot of that had to do with ECB uncertainty. Now that euro has survived negative rates, EUR/JPY should be able to trade higher. At the same time, Friday’s non-farm payrolls report supported the recent gains in USD/JPY.

Technicals

Taking a look at the daily chart of EUR/JPY, the currency pair has been in turn mode since the end of last month and with the latest rally, it has now entered the Buy Zone according to our Double Bollinger Bands. A break of 140 would take the currency pair well above the 38.2% Fibonacci retracement of the December to February decline and psychologically significant resistance level. If that occurs, there’s no major resistance until 141. However if EUR/JPY fails at current levels, a drop back down to its 3 month low of 138 becomes likely.