EUR/CAD To Break 1.45?

The euro rally came to a halt today on the back of softer Eurozone data and the recovery in the greenback. Manufacturing activity in the Eurozone slowed in the month of July, causing the PMI composite index to drop to 55.8 from 56.3. Service sector activity remained steady but that was not due to strength in the region’s 2 largest economies (France and Germany). Germany experienced slower growth all around and while service sector activity in France slowed, manufacturing activity accelerated. These are the first signs of the strains caused by a strong currency. With the PMIs falling short of expectation and investor confidence weakening (ZEW), we believe tomorrow’s German IFO report will add further pressure on the euro as businesses are the most sensitive to the exchange rate and the prospect of higher interest rates. In contrast, we believe the Canadian dollar could hold onto its gains and take another trip below 1.25. The loonie hit a fresh 14 month high on the back of stronger wholesale sales and the more than 1% increase in oil prices. While USD/CAD ended the NY trading session above the key 1.25 level, the 2016 low of 1.2461 is more significant support and we would not be surprised if USD/CAD drifted to that level before Friday’s Canadian GDP report.

Technically, EUR/CAD failed to break above 1.4700 last week, despite multiple attempts. This rejection of the 20 and 100-day SMA cross near 1.4680 puts the currency pair on track to test its 2 month low right above the 200-day SMA at 1.4450.