Technicals and Triggers: EUR/USD, USD/JPY, and USD/CAD

EUR/USD excessively overbought?

The euro-dollar ascent was mostly a one-way move for most of July.  After inflation eased to the slowest pace in more than two years, the dollar tumbled.  With the Fed entering their blackout period before the July 26^th FOMC meeting, the lack of hawkish pushback has allowed the dollar to remain vulnerable to further pain just ahead of the 1.1300 handle.  Bullish momentum has cleared multiple hurdles but the 1.1350 level should prove to be rather strong.

While the end of the Fed’s tightening cycle appears to be in place, expectations are shifting that the ECB might not be that far from pausing their rate hiking cycle.  Today’s comment from ECB’s Knot, a well-known hawk, suggested that they could be ready to pause in September and that it might hinge on the inflation data going forward.

All eyes will be on the Wednesday’s second reading of euro-area inflation.

The EUR/USD daily chart displays a potential bearish butterfly pattern. Point D is targeted with the 1.414 1.414% Fibonacci expansion level of the X to A move and the B to C leg.  If dollar strength emerges here, downside could target the 1.1050 level.

If invalidated, bullish momentum could surge above the 1.1300 region, potentially targeting the 1.1450 resistance zone.

USD/JPY dead-cat-bounce or sustainable rally?

The plunge for dollar-yen accelerated after last week’s cooler-than-expected inflation report shifted Fed rate hike expectations. The macro backdrop has mostly seen investors calling for pain for the Japanese yen since 2021.  Hedge funds ramped up bearish yen bets(according to the COT report for the week through July 11^th), taking their net short positions to the largest level since last May.

Now the focus also includes the BOJ, which includes some disappointment with keeping the BOJ keeping Yield Curve Control intact. Yen volatility could remain excessive if the Fed signals more tightening might need to be done after the July 26^th FOMC meeting and if BOJ doesn’t tweak their policy.

Over the next couple of weeks, it seems that the yen rally will either cool towards 141.50 (a temporary recovery) or we will see it surge below 136.00 (the downtrend remains in place).

USD/CAD approaches key support

The Canadian dollar initially weakened after headline inflation fell to a 27-month low, dropping from 3.4% to 2.8%, more than the eyed 3.0% consensus estimate.  The rates that the BOC focuses on, the so-called trim and median core rates, were a little sticky, which could suggest underlying price pressures are still too high.  The Canadian dollar has been rallying but if global slowdown fears increase, that could keep the Loonie locked in its longer-term consolidating range. The Canadian dollar has major support from the trendline beginning last June.  If price breaks below the upward sloping trendline, bearish momentum could target the 1.3020 level.  A daily close below 1.2950 could open the door for selling momentum to target the 1.2750 area.

Inflation is making its way towards the BOC’s 2% inflation target, but it seems more tightening might not be needed to get inflation there. If Friday’s retail sales report shows the consumer remains resilient, that could trigger further Canadian dollar strength.

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