BoC expected to cut rates, but will it signal more?

The USD continued to edge higher against its counterparts yesterday yet seems to be correcting a bit lower during today’s Asian session. On a fundamental level, the spotlight remains on Kamala Harris, while on a macroeconomic level, we note that the existing home sales for June dropped more than expected, while we also get some US construction data today as well. Yet the headlight is expected to be placed on the US preliminary PMI figures for July in an effort to gauge economic activity and the market’s worries tend to revolve around the manufacturing sector.

The main event of the day though is expected to be north of the US border as Canada’s BoC is to release its interest rate decision in the American session today. The bank is widely expected to cut rates by 25 basis points and according to CAD OIS currently, an 87% probability seems to exist for such a scenario to materialise. Yet CAD OIS also implies that the market prices in the possibility of another rate cut in October and another in December. Hence should the bank cut rates as expected attention is to be placed on the accompanying statement. Should the statement show a predisposition of the bank to cut rates further, thus confirming the market’s expectations we may see the bearish sentiment on the CAD intensifying.

USD/CAD continued to rise yesterday breaking the 1.3775 (S1) resistance line now turned to support. Given that the pair’s upward movement has been able to break the upper boundary of the pair’s past sideways motion and the upward trendline remains intact, we favor a bullish outlook. Also the RSI indicator is still rising and currently aiming for the reading of 70, implying that the bullish sentiment among market participants for the pair seems to be intensifying. On the other hand we note that the price-action is flirting with the upper Bollinger band which may slow down the bulls or even cause a correction lower. Should the bulls maintain control over the pair we expect USD/CAD to aim for the 1.3895 (R1) resistance line, with the next possible target for the bulls being set at the 1.4050 (R2) level. For a bearish outlook we would require the pair to break the 1.3775 (S1) support line, continue lower to break the prementioned upward trendline, in a first sign that the upward movement has been interrupted and continue to break also the 1.3600 (S2) level.

EUR traders are expected to keep a close eye on the release of the preliminary PMI figures for the current month for France, Germany and the Eurozone as a whole. The numbers are expected to improve, yet a shadow falls upon the macroeconomic outlook of the Eurozone as despite the improvement of economic activity Germany’s manufacturing sector, which is considered the spearhead of the Eurozone’s economy is expected to suffer another contraction of economic activity. A small word of warning for EUR traders on a monetary level, we note that ECB officials are discussing the possibility of increasing the bad loan provisions, which tends to highlight the problems in the recovery of the Eurozone’s economy also on a macro level.

EUR/USD continued to weaken yesterday and decisively broke the 1.0890 (R1) support line, now turned to resistance. We note that the RSI indicator dropped reaching the reading of 50 and implying that the bullish sentiment among market participants has been erased, yet bearish tendencies have still to be build up. Nevertheless, given the intensity of yesterday’s movement we expect the bearish direction to be maintained for now and over the short term. Should the bears maintain control over the pair we expect the pair to aim if not reach the 1.0740 (S1) support line. Should the bulls take over, we may see the pair reversing direction, breaking the 1.0890 (R1) resistance line and aim for the 1.1010 (R2) resistance level.

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Today, besides the preliminary PMI figures of the UK for July, we note the release of Germany’s GFK consumer sentiment for August, the US new home sales for June and the weekly EIA crude oil inventories figure. On the monetary front, ECB Board member Lane and Buch are scheduled to speak.