EURCAD recently formed an inverse head and shoulders pattern on its daily time frame, indicating that the pair is already exhausted from its dive. Price just broke past the neckline resistance around the 1.3800 major psychological level after the ECB rate statement and Canada’s weaker than expected trade balance release.
According to Draghi, they have no plans of tapering their quantitative easing program yet and they might even extend it past September 2016 if the economy takes longer to achieve their inflation goals. He suggested that they might not front-load their asset purchases though since they’re worried about financial market volatility.
As for Canada, the country indicated a worse than expected trade deficit of 3.0 billion CAD versus the projected 2.8 billion CAD shortfall. To make things worse, the previous month’s report was downgraded to show a wider deficit of 3.9 billion CAD.
The chart pattern is approximately 800 pips tall, which means that the resulting rally could last by the same amount. This could take the pair up to the previous resistance near the 1.4500 major psychological level.
For now, the short-term exponential moving average is still treading below the long-term EMA but signs of an upward crossover are materializing. Once this happens, buyers would get more confirmation that price is headed further north.
Stochastic is almost in the overbought region already, suggesting that a pullback might take place before further gains are seen. The pair could retreat to the neckline to draw more buyers in around the potential support area. However, a break below this area might indicate that the downtrend could still resume.
Event risks for this trade setup include the release of Canada’s jobs report on Friday, which might indicate another downturn in hiring. In that case, the pair could be in for more gains as the Loonie sells off. On the other hand, an upside surprise could lend some support for the Canadian currency.
By Kate Curtis from Trader’s Way