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EUR/USD Pares Gains as Core U.S. PCE Climbs Ahead of FOMC Meeting

EUR/USD Pares Gains as Core U.S. PCE Climbs Ahead of FOMC Meeting

David Song, Strategist

Talking Points:

- EUR/USD Pares Gains as Core U.S. PCE Climbs to 2.0% Ahead of FOMC.

- USD/CAD Climbs to Fresh 2017 High as Canada GDP Holds Flat in February.

DailyFX Table

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

EUR/USD

1.0900

1.0947

1.0857

27

90

EUR/USD struggles to retain the advance following the larger-than-expected uptick in the Euro-Zone’s Consumer Price Index (CPI) as data prints coming out of the U.S. highlight a similar dynamic, with the core Personal Consumption Expenditure (PCE), the Federal Open Market Committee’s (FOMC) preferred gauge for inflation climbed to an annualized 2.0% during the first three-months of 2017.

Even though the Fed is widely anticipated to retain the current policy at its next interest rate decision on May 3, Fed Fund Futures are still pricing a greater than 70% probability for a June rate-hike, and Chair Janet Yellen and Co. may continue to prepare U.S. households and businesses for higher borrowing-costs as the committee appears to be on course to fulfil its dual mandate for full-employment and price stability. Despite the usual quiet period ahead of the two-day meeting, fresh comments from Fed Governor Lael Brainard and Philadelphia Fed President Patrick Harker, both 2017-voting members, may sway market expectations as the central bank start to lay out a more detailed exit strategy.

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EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • Nevertheless, keep in mind that the broader outlook for the euro-dollar exchange rate has become less bearish as it makes a more meaningful attempt to break out of the downward trend carried over from 2016, with price & the RSI preserving the bullish formations from earlier this year, but the recent resilience in the single-currency may push the European Central Bank (ECB) to further tame market expectations as President Mario Draghi and Co. pledge to ‘look through transient developments in HICP inflation, which have no implication for the medium-term outlook for price stability.
  • With that said, a hawkish FOMC policy statement accompanied by a 193K expansion in U.S. Non-Farm Payrolls (NFP) may keep EUR/USD capped over the days ahead, with the pair at risk for a larger pullback especially as the Relative Strength Index (RSI) fails to push into overbought territory and struggles to preserve the bullish formation from earlier this month.
  • Will keep a close eye on the monthly opening range for May amid the key event risks coming out of the U.S., but the lack of momentum to hold above the topside hurdle around 1.0880 (61.8% expansion) to 1.0910 (38.2% expansion) may push EUR/USD back towards the Fibonacci overlap around 1.0780 (100% expansion) to 1.0790 (38.2% expansion), with the next area of interest coming in around 1.0660 (50% expansion) to 1.0680 (78.6% expansion).

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

USD/CAD

1.3679

1.3697

1.3625

46

72

The Canadian dollar lags behind its major counterparts, with USD/CAD advancing to a fresh 2017-high of 1.3680 as Canada’s monthly Gross Domestic Product (GDP) report showed the growth rate holding flat in February. The recent weakness in the loonie may gather pace going into May as the Bank of Canada (BoC) looks poised to keep the benchmark interest rate at the record-low for the foreseeable future, but Canada’s Employment report may offer some relief as the economy is anticipated to add another 20.0K jobs in April.

USD/CAD Daily

USD/CAD Daily Chart

Chart - Created Using Trading View

  • Despite initial signs of a divergence, the move higher in the RSI raises the risk for a further advance in the exchange rate especially as the oscillator pushes deeper into overbought territory; need to see the momentum indicator highlight a textbook sell signal and slip below 70 to set the stage for a pullback.
  • Nevertheless, the ongoing improvement in the labor market may have little to no impact on the monetary policy outlook as the BoC argues ‘CPI inflation is now at the 2 per cent target, largely because of the transitory effects of higher oil prices and carbon pricing measures in two provinces, as well as other temporary factors;’ the deviating paths for monetary policy should continue to encourage a long-term bullish outlook for USD/CAD, with the pair still operating within the ascending channel carried over from the previous year.
  • Even though price approaches the top of the channel, a close above the Fibonacci overlap around 1.3630 (38.2% retracement) to 1.3670 (78.6% expansion) will keep the near-term bias tilted to the upside, with the next topside hurdle coming in around 1.3790 (100% expansion) to 1.3840 (61.8% retracement).

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IG Sentiment
  • Retail trader data shows 30.4% of traders are net-long EUR/USD with the ratio of traders short to long at 2.29 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.07291; price has moved 1.6% higher since then. The number of traders net-long is 2.8% higher than yesterday and 22.5% lower from last week, while the number of traders net-short is 0.6% lower than yesterday and 30.4% higher from last week.
  • Retail trader data shows 32.9% of traders are net-long USD/CAD with the ratio of traders short to long at 2.04 to 1. In fact, traders have remained net-short since April 18 when USD/CAD traded near 1.33818; price has moved 2.2% higher since then. The number of traders net-long is 8.9% higher than yesterday and 9.9% higher from last week, while the number of traders net-short is 6.4% lower than yesterday and 6.0% higher from last week.

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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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