There were plenty of catalysts to chew on this week, and our forex strategists focused on the Euro area CPI and U.K. general elections to dictate asset selection and biases this week.
Out of the four scenario/price outlook discussions this week, two discussions saw both fundie & technical arguments triggered to become a potential candidate for a risk management overlay. Check out our review on that discussion to see what happened!
Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high quality discretionary trade idea before working on a risk & trade management plan.
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EUR/CAD: Monday – July 1, 2024
EUR/CAD 1-Hour Forex Chart by TradingView
On Monday, we took a look at the euro for potential short-term setups and elevated volatility with the latest Euro Area CPI report set to release on Tuesday.
Based on our work seen in our Euro Area CPI Event Guide, Euro area leading indicators pointed to a deceleration in consumer price growth in June.
Our thought was that if we did see Euro Area CPI come inline with expectations of a net slowdown in inflation growth, then we discussed potential price outlook and scenarios in EUR/GBP as Sterling was likely to outperform the euro due to the strong selling pressure the pair has been under since May.
On the other hand, if the Euro Area CPI data signaled net sticky inflation growth conditions, then we turned to EUR/CAD for as a pair that may see gains, partly due to recent net dovish rhetoric from the Bank of Canada and expectations of a weak Canadian jobs update.
Well, Euro area consumer inflation data came in mixed with the headline rate dipping to 2.5% y/y from 2.6% y/y, but the core rate coming in higher than expected, holding at 2.9% y/y. And given both numbers are still well above inflation targets, along with a very high services inflation read of 4.1% y/y, we argue that this outcome was net supportive of the euro.
The euro actually fell on net post CPI release, but this was somewhat expected given the bullish behavior on Monday leading up to the event (likely due to recent downplaying of rate cuts from ECB officials).
Following the event and initial reaction, EUR/CAD slowly drew in buyers through the week, leading to a bullish spike higher on Friday after a net weak Canadian jobs update. This event pushed the pair to not only test our first target resistance area at 1.4750, but also close the week on a strong note for the bulls, near the intraweek high of 1.4780, up over 70 pips from the Euro area CPI outcome.
Overall, we think this watchlist discussion was “highly likely” net supportive of a potential positive outcome, given that the pair spent most of its time in a favorable price area relative to our discussion and event prices, and it reached our upside target.
And based on the steady rally after the initial dip, then spike higher, it would likely not have needed a complex risk/trade management plan to reach a net positive outcome.
GBP/CHF: Tuesday – July 2, 2024
GBP/CHF 1-Hour Forex Chart by TradingView
On Thursday, the U.K. Parliamentary Elections was our next catalyst of choice, potentially raising volatility in the British pound.
In the Babypips.com Event Guide for the U.K. Parliamentary Elections, expectations were for a Labour party win outcome, which was generally agreed to be very beneficial for the U.K. economy. This was likely due to the Labour Party’s views on higher government spending, taxation for energy companies, and their relationship with the European Union.
In the case where the Labour Party did win, we leaned bullish on GBP/CHF, choosing the franc due to a recent cut from the Swiss National Bank and the possibility of the upcoming Swiss CPI report to signal continued deceleration in inflation rates. We also thought a pullback in the GBP/CHF uptrend was a possibility, and if so, that scenario may draw in both technical and fundamental buyers in the pair.
But if the markets were surprised with a “hung parliament” outcome, or it was a relatively weak win for the Labour Party, we looked at GBP/AUD as potentially drawing in net Sterling sellers, likely attracted by the surprise strong inflation data in Australia recently to keep RBA rate hike speculation alive.
Not too long after we posted our watchlist discussions on Sterling, GBP/CHF did dip to our targeted support area of interest (38% Fibonacci retracement / R1 Pivot level), and it looks like buyers were eager to jump in, likely pricing in the expected Labour Party victory ahead of time.
The following rally took the market to the 1.1500 major psychological level, where it found a top after a weaker than expected Swiss CPI read (slowing to 0.0% m/m vs. 0.3% m/m previous). GBP/CHF did spike higher on the event, but given the strong rally up to that point, it looks like profit taking on the event was the behavior of choice by traders, especially with the U.K. general election event right around the corner.
Voting for the U.K. Parliamentary Elections began on Thursday, and as expected, the Labour Party secured a landslide win on Friday. This correlated with one final move in GBP/CHF higher, but this was met by sellers during the U.S. trading session, correlating with a weak U.S. jobs update likely raising global recession fears on the session. It’s also likely there were some Sterling bulls taking in some profits ahead of the weekly close.
Overall, we think that watchlist discussion on GBP/CHF was “likely” supportive of a potential net positive outcome. Our discussion on a potential support area and our expectations on the Swiss CPI and U.K. general election events played out as expected, resulting in GBP/CHF moving in our biased direction.
A big factor on a trade outcome would have been whether a pre-preemptive long position move was taken right when the target support area was tested or if a risk manager waited until the event before taking on risk. If it was the latter situation, arguably no action would have been taken.
But for those who did take a long at the Fibs, it’s highly likely of a positive outcome given the strong rally higher heading into both target catalysts, as long as adjustments to take profit/reduce risk were made after the target catalysts played out.
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