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by Darius Anucauskas

Canadian Inflation Numbers Are On The Watch Today; No Surprises From Japanese CPI; Bad Week For The British Pound

For sure, we can say that this has not been the week for the British Pound, as yet again, the data released from the UK on Thursday disappointed economists and investors. The UK retail sales figures were already projected to come lower than the previous, but the outcome was even worse. The headline MoM number for June came out at -0.5%, despite expectations of coming at around +0.1%, especially when the previous was at +1.4%. The core MoM retails sales, which exclude autos and fuel, were also shattered, as the expected -0.3% was beaten by the -0.6% for the month of June. Taking into consideration the fact that the previous MoM core number was also at +1.4% as the headline, the new figure was an absolute disappointment.

All this week’s negative data from the UK, raises concerns over the possibility of the BoE raising interest rates during the next meeting on the 2nd of August. The bank is expected to raise the interest rate by 25 bps, which would lift the rate to +0.75%. The rate has never been at that specific rate before in the history of the BoE. Even on the 5th of March 2009, when the Bank lowered its rate, it went straight away from +1% to +0.5%. The probability for the BoE to raise the policy rate probability currently sits at around 67%, given the fact that it was at around 82% on Thursday. Nevertheless, we believe that a week of bad data would not stop the BoE from hiking the rates this time.

Today, during the Asian morning, Japan released its inflation data. The core YoY number, which excludes fresh food prices, came out as expected at +0.8%, where the previous was sat at +0.7%. But the headline YoY CPI remained the same as its previous +0.7%, even though the expectation was the same as the core number of +0.8%. Nevertheless, this is a slight improvement from the April figure, which came out at +0.6%. The important thing to point out here is that the actual inflation number is well below the Bank of Japan target rate of +2.0%.

As for today’s upcoming events, all eyes are on the Canadian inflation numbers. The core YoY CPI, which excludes food and energy, is expected to come out at +1.4%, slightly above the previous +1.3%. The headline YoY CPI figure is expected to grow by one tenth of a percent, going from +2.2% to +2.3%. Certainly, the numbers are still within the BoC’s range target (from 1 to 3 percent on a YoY basis) but is slightly above the midpoint of that range. The numbers are important for the BoC, as they act as a gauge for deciding on the future of their interest rates.

At the same time, we will get the Canadian headline and core MoM retail sales figures, where both are expected to have improved from their previous ones. The core is expected to rise from the previous -0.1% to a much stronger +0.5% number for the month of May. We have a similar story for the headline May number, where it is expected to increase to 0.0% from -1.2% a month before. We believe that even if these do not meet expectations, but still come out better than the previous numbers, then it could still have a positive effect on the Canadian dollar against some of its counterparts.

USD/CAD – Technical Outlook

USD/CAD slowly continues to climb higher, making its way this week to the 1.3290 zone, which held down the further acceleration of the rate. The pair is trading above its mid-term upwards moving trendline, taken from the 17th of April, which is seen as a positive for the near-term outlook. Until that trendline remains intact, we will stick to the upside.

USD/CAD, at the time of this report, sits near its support at 1.3245. If this continues to hold, then we could see a bounce back to the 1.3290 barrier, a break of which could open the path towards the 1.3385 area, marked by the June highs. If that area is not able to withhold USD/CAD from moving higher, then the next potential resistance zone could be seen at 1.3475.

Certainly, let’s not exclude a possibility of a correction back down towards the aforementioned trendline, which could also act as a new spot for the bulls to go in and drive the pair higher, the previously mentioned levels.

If that trendline does not hold, this could play out badly for USD/CAD and we could see it sliding lower. But in order to get comfortable with the downside scenario, we would need to see a 4-hour-candle close, not only below that upside trendline, but also below the 1.3110 level. Only then we could start examining a further decline. The next potential area of support could be the 1.3065 zone, marked by the lows of the 9th and the 11th of July. A break of that zone could set the stage for a potential drop towards the 1.2945 hurdle, which acted as good support on the 14th of June.

EUR/JPY – Technical Outlook

Since its reversal on Tuesday, EUR/JPY is steadily moving lower, where the near-term outlook could turn negative for this pair. Overall, EUR/JPY is above its mid-term upside support line, taken from the low of the 29th of May, but the fact that the pair is trading far away from that line, it could start acting as a magnet for EUR/JPY.

Currently just slightly above a key area of support at 130.75, EUR/JPY could eventually break it, which could be a good sign for more bears to join in and drive the pair lower. The next strong support zone could be seen at 129.90, marked by the low of the 11th of July. If this zone is not able to withhold the rate from dropping further, we could them aim for a test of the 129.50 hurdle, or even the aforementioned upside support line. The line could force EUR/JPY to stall, because the bulls and the bears would have to decide, who will take the driver’s seat from there.

Alternatively, if EUR/JPY makes a strong move back up to the 131.20 barrier, a break of it could set the stage for this week’s high at around 132.00 zone. The area could act as strong resistance for the pair initially, but if it doesn’t hold, EUR/JPY could make a move higher towards the 132.55 barrier, marked by the high of the 30th of April.

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