FX Watch: EUR/USD within wedge formation, USD/CAD stuck in broad indecision

Round-up

Amid a quiet day on the economic front and a slew of key inflation releases ahead, Wall Street ended mixed overnight as a reflection of some reservations around risk-taking for now. The dust has largely settled from last week’s volatility, as major US indices trade above Monday’s high, but markets remain on the lookout for fresh catalysts to drive further recovery. The VIX pared earlier losses to defend its key 20 level, Treasury yields were slightly lower, while the US dollar consolidates.

Currently, the Fear and Greed Index remains in “extreme fear” territory, which offers room for bearish sentiments to unwind, but more conviction around the resilience in US economy may still be needed to back calls for a soft landing. Concerns around economic risks may still be on the table, with markets pricing for back-to-back rate cuts from the US Federal Reserve (Fed) ahead and cumulative 100 basis points (bp) worth of cuts by the end of this year, which can be arguably a reaction to a significant weakening in US economic growth.

Eyes will be on the US July producer price index (PPI) release today, which may be looked upon as a precursor to US consumer prices this week. Expectations are for further moderation in prices, with headline PPI to ease to 2.3% from 2.6% prior. The core aspect is expected to ease to 2.7% from the 3% prior. Matching expectations may be met with further calm for markets, with inflation progress offering room for the Fed to dial back on its tight policies, while the absence of any significant downside surprise may point to still-resilient growth conditions.

EUR/USD eyeing for a break above wedge formation

The EUR/USD has managed to gain as much as 2% since the start of the month, but are finding some near-term resistance at the 1.093 level, where the upper trendline of a broader wedge formation stands in place. Any move back above last Monday’s close may suggest buyers taking greater control, which may leave eyes on the 1.110 level next for a retest. Positive economic surprises from China, a lesser extent of rate cuts priced for the European Central Bank (ECB) compared to the Fed and the improved risk environment may serve as positive catalysts for the euro against the US dollar for now.

On the downside, failure to overcome the 1.093 level could see a trickle back towards the 1.072 level, where the lower wedge trendline will be on watch to support yet another higher low.

USD/CAD stuck in broad indecision

The USD/CAD has been trading within a rectangle pattern since September 2022, with multiple retests of the upper consolidation range failing to find any successful break thus far. Much will revolve around the US inflation figures ahead to determine the extent of Fed’s policy easing ahead and lead direction in the US dollar.

Failure to cross above the 1.386 level could leave eyes on the 1.331 level for potential support from the lower consolidation range. On the other hand, a decisive close above the 1.386 level will be significant, which could suggest greater control from buyers and leave the March 2020 high at the 1.455 level on watch next.