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EUR/CAD Shaping up for Long-Term Reversal as Oil, Inflation Rise

EUR/CAD sold off into the end of Q3 after the European Central Bank (ECB) hiked rates to 4% which may prove to be the peak. The euro depreciated immediately as markets lowered their expectations of another hike. Fundamentals in Europe also remain weak as the global growth slowdown takes hold, weighing on the EU currency. The German economy stagnated and could even be experiencing a recession at the time of writing this while the rest of Europe follows not far behind.

China’s disappointing reopening of its economy has a direct effect on Europe as it remains a major trading partner. The Asian nation’s prospects have also soured as the beleaguered property sector desperately scrapes by, demand for imports has waned significantly and exports aren’t being picked due to the global slowdown.

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Across the Atlantic, Canada is also struggling form a growth perspective but relatively speaking, they are witnessing modest growth. Another positive for Canada is the recent surge in oil prices which includes WTI produced in Canada which ought to add to local revenues when converted into Canadian dollars given that global oil demand has proven robust.

Canada also holds an advantage via the interest rate differential between the two nations, something that may underpin EUR/CAD direction in Q4. Not only that, but due to a recent uptick in headline inflation in Canada, markets have priced in a near 50/50 chance that the Bank of Canada will hike rates again in October.

Implied Interest Rate Odds

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Source: Refinitiv, Prepared by Richard Snow

In August, Canadian headline inflation not only rose but it surpassed already elevated forecasts of 3.8% to print at an even 4%. July inflation was 3.3% which was already up from June’s 2.8%, establishing a worrying trend of rising data points. The threat of higher price pressures may not cause immediate panic but if it filters into the core measure, officials may have to raise interest rates to 5.25% before year end.

Canadian headline inflation (CPI)

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Source: Refinitiv, Prepared by Richard Snow

The technical picture presents what looks like the formation of a head and shoulders pattern, a well-known long-term reversal formation. At the time of writing, prices are yet to breach and close below the neckline on the weekly chart which is the first step in how these patterns tend to play out. Thereafter a pullback towards the neckline (as resistance) can be observed before the bearish momentum has the opportunity to kick in.

Therefore, in the event prices head lower in Q4, a pullback towards 1.4280 opens the door to a move down to the psychological level of 1.4100. There are no clear and obvious targets thereafter apart from 1.3700 which is a fair distance away. The trade can be considered invalidated in the event price action closes below 1.4280 and reverses higher to break 1.4430 to the upside.

EUR/CAD Weekly Chart

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Source: Tradingview, Prepared by Richard Snow

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