Dollar analysis: EUR/USD, USD/CAD and Gold outlook - Technical Tuesday

• Dollar analysis: EUR/USD clings onto 1.07 handle for now
• Dollar analysis: Can USD/CAD bulls defend 1.3550 support?
• Gold outlook: Precious metal breaks 200-day average

Welcome to Technical Tuesday, a weekly report where we highlight some of the most interesting markets that will hopefully appease technical analysts and traders alike.

In this edition of Technical Tuesday, we will analyse the EUR/USD, USD/CAD and gold.

Dollar analysis: EUR/USD clings onto 1.07 handle for now

The EUR/USD was clinging onto the 1.07 handle at the time of writing. The lower highs and lower lows on the EUR/USD mean that the technical outlook remains bearish until the charts tell us otherwise. Key resistance held earlier around the 1.0765-75 area, which was previously support. From there, rates started to fall before turning negative. But even if the EUR/USD now rebounds and again and rises a little above that zone, this won’t necessarily be the end of the bearish trend. The bulls will still be eying a higher high above 1.0945 for confirmation. On the downside, the next major target for the bears is liquidity below the May 2023 low of 1.0635.

While the upcoming US inflation data on Wednesday will probably provide the same directional bias for all the major pairs, the EUR/USD will be facing an additional test from Thursday’s ECB meeting, which could move the euro sharply.  With the euro (and pound) weakening again, it is obvious investors continue to remain concerned over the growing threat of stagflation in Europe. High levels of inflation and low growth, combined with downbeat business and consumer sentiment, and not to mention rising borrowing costs, all make for a tough economic climate for investors to navigate through. Unsurprisingly, there’s not much appetite for taking on too much risk right now. The key risk now is if the ECB hikes anyway, which should send the euro spiking higher – even if temporarily.

Dollar analysis: Can USD/CAD bulls defend 1.3550 support?

The USD/CAD has fallen sharply ever since Friday’s Canadian employment report turned out to be stronger than expected, while the continued strength in crude oil has also helped to underpin the CAD. But with the Bank of Canada likely to be done with rate hikes and the US dollar continuing to show strength elsewhere, I wouldn’t rule out the possibility of a fresh bullish wave to emerge in the USD/CAD around the current levels.

If the bulls are to show up, they need to do so now. The USD/CAD was testing key support around 1.3550 area at the time of writing. This was the base of the breakout from last week, and where we have the 21-day exponential average come into play. The bulls will be looking for a strong recovery to keep their hops of seeing 1.37+ alive. However, if the USD/CAD ends the day decidedly below 1.3550 support then this would more or less invalidate our bullish view on this pair, although for confirmation we would still need to see a lower low below 1.3489 – the low from a couple of weeks ago.  

Gold outlook: Precious metal breaks 200-day average

Gold is finding itself about $10 above $1900 again after its latest attempt to move higher failed. The precious metal has broken below its technically-important 200-day moving average ahead of US CPI and ECB policy decision, which has already triggered follow-up technical selling. More losses could be on the way, thanks to the strength of the dollar and yields.

The path of least resistance will remain to the downside for as long as gold holds below the broken support around the $1914/16 area. This is now the most important short-term resistance zone to watch.

Where gold goes from here will depend on the direction of the US dollar. After rising for the 8th consecutive week, the Dollar Index took a breather at the start of this week amid the lack of any fresh news. But the uptrend has resumed for the greenback, and more gains could follow if US CPI turns out to hotter.  Without a significant change in the current macro backdrop, the dollar is likely to continue finding buyers on the dips in the short-term outlook. The greenback has been supported in recent weeks by US data continuing to surprise to the upside, while weakness in foreign data and currencies also helped to provide indirect support. We had better-than-expected ISM services PMI and weekly jobless claims data last week, putting some doubts over the narrative that the labour markets tightness was easing. Eurozone and Chinese data in particular have been rather weak, and correspondingly we have seen the euro and yuan slump against the dollar.

Investors’ focus will turn to Wednesday’s publication of CPI and other key US data due to be released later this week. The inflation data could influence the Fed’s decision whether to hike further or not. The market appears convinced that the Fed won’t hike in September, with a 93% probability. However, the market is still around 50/50 about whether the Fed will hike rates again in the November meeting. Even if the Fed opts against hiking this year, traders are expecting interest rates to remain at current levels longer than they had previously been expecting. This is what has helped to keep the dollar underpinned in recent weeks. And judging by what economists are expecting from the latest CPI report, i.e., an acceleration to +3.6% y/y from +3.2% in the previous month, the dollar could remain supported for a while yet.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R