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GBP/USD Awaits Catalyst; USD/CAD, CAD/JPY at Crossroads

GBP/USD Awaits Catalyst; USD/CAD, CAD/JPY at Crossroads

2017-07-11 12:00:00
Christopher Vecchio, CFA, Senior Strategist
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Talking Points:

- GBP-crosses await commentary from BOE's Broadbent, who has yet to update his policy views. Another new convert to the hawkish camp could reinvigorate GBP bulls.

- Depending upon the BOC tomorrow, either USD/CAD could look to bottom or CAD/JPY could breakout of what could be an inverse head & shoulders bottom.

- See our long-term forecasts with the DailyFX Q3'17 Trading Guides.

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The US Dollar (via DXY Index) is having a quiet morning after a lackluster day yesterday, as an empty economic calendar in the first two days of the week have left traders searching for catalysts. Today, important data releases are notably absent from the calendar in the North American trading session, and the only potential exception to that would be the upcoming speech by Bank of England policymaker Ben Broadbent.

Unlike several of his counterparts in recent weeks, the BOE's Broadbent has yet to reveal to the market his leanings after the latest round of inflation data. After several policymakers, including Governor Mark Carney and Chief Economy Andy Haldane, gave tacit endorsements for a rate hike this year, the British Pound found a new source of fuel to rally.

Yet after last week's data debacle which saw UK economic data momentum indicators move to yearly lows and their lowest levels since June 2016, the British Pound has struggled to regain traction. Should the BOE's Broadbent come out today with a more hawkish tone in line with his colleagues, don't be surprised if GBP-crosses take a leg higher. Otherwise, failure to convert to the hawkish side may deflate a recently dejected British Pound.

Elsewhere, the Canadian Dollar continues to trade off of its yearly highs ahead of tomorrow's Bank of Canada rate decision. With markets having already priced in a rate hike - overnight index swaps suggest a 94% chance of a 25-bps move - the key factor will not be the hike itself (although if they don't for whatever reason, the Canadian Dollar will get smacked lower), but rather the language contained in their policy statement.

In the BOC's policy statement, market participants will be looking for guidance as to whether or not the BOC will be looking to hike again in the second half of 2017. Currently, there is a 65% chance of a second rate hike by the end of the year. As such, a hawkish policy statement - one that highlights the upswing in growth (now +3.3% y/y) - could prove another lift for the Canadian Dollar. In this event, CAD/JPY is the preferred vehicle to trade (see video for technical details).

Conversely, any sense of a 'one-and-done' rate hike could spook what is a clearly stretched currency in the near-term. A dovish policy statement that highlights the weak inflation environment (last print was +1.3% y/y) and the sharp downturn in urban housing markets in the past three months may mark the end of the Canadian Dollar surge. In this event, USD/CAD is the preferred vehicle to trade (see video for technical details).

See the above video for a technical review of the DXY Index, EUR/USD, GBP/USD, USD/JPY, USD/CAD, GBP/JPY, and CAD/JPY.

Read more: FX Markets Hone in on US Economic Data, Yellen’s Congressional Testimony

--- Written by Christopher Vecchio, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher's e-mail distribution list, please fill out this form

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