Trading insight: EUR/USD, USD/CAD key levels ahead of FOMC

EUR/USD, USD/CAD, FOMC Talking Points

• Euro Area core inflation rate falls in-line with expectations, inflation rate YoY (August) comes in slightly lower than expected (5.2% vs 5.3% forecast).
• USD/CAD slumps to 50 - day moving average (MA) support after key inflation print.
• The Federal Reserve prepares for FOMC economic projections and interest rate decision tomorrow (18:00 UTC).

Inflation data from Euro Area and Canada, US housing permits smash estimates

EUR/USD is currently trading in a narrow zone of technical support and resistance around the key psychological level of 1.070.

After nine consecutive weeks of losses, a bounce off of the low of 1.0632 last week allowed bulls to push prices higher, in an attempt to pause the steep downtrend that has persisted since July.

With Euro Area inflation rate coming in slightly lower than forecasts in August, EUR/USD remained relatively subdued, with focus shifting to tomorrow’s Fed rate decision.

As inflation remains a key concern for global policymakers, Canada’s core inflation rate MoM for August fell from the previous 0.5% to 0.1%, driving USD/CAD below the 50 - day MA, now providing resistance around the 1.341 mark.

While the Euro Area and Canada were on high alert for the inflation data, building permits out of the United States smashed estimates, but the data print had little impact on the greenback.

With the US dollar, currently the reserve currency (a large portion of trade is paid for in USD), interest rates in the US tend to influence other central banks who will then possibly have to pay more to finance the dollar denominated debt. As expectations are for the Federal Reserve to start slowing the pace of tightening, or holding off on additional rate hikes, inflation still remains above the Fed’s target rate of 2%, making the objectives of the dual mandate (employment and price stability) more difficult to achieve.

If the Fed does raise rates, this may be supportive of USD strength, although the current probabilities are in favour of a pause.

USD/CAD technical analysis

While USD/CAD currently trades 0.70% lower on the day, another key zone of support rests at a level that helped cap the downward move in December last year and throughout April and May this year, before providing resistance in June and July. For downward momentum to gain traction, a break of this level could reignite bearish momentum with the next big level resting at 1.3228.

USD/CAD daily chart

Chart prepared using TradingView