Analysis: USD/CAD, EUR/USD, GBP/USD, and AUD/USD

Wednesday, 04 September, Week 36

Welcome to this week's Forex Market Analysis report, where we delve into the intricate world of currency trading, providing you with valuable insights and actionable intelligence to navigate the ever-changing tides of the financial markets.

This week, market sentiment is likely to be dominated by the anticipation of the Federal Reserve's upcoming interest rate decision, scheduled for Tuesday and Wednesday, September 17-18, Week 38. The recent uptick in the US unemployment rate and slowing job gains have solidified market expectations for a rate cut, with traders closely watching economic data releases and Fed communications for clues about the potential size and timing of the cut.

To recap key events shaping the current market landscape. The US economy expanded at an annualised rate of 3.0% in the second quarter, exceeding expectations. However, the manufacturing sector continues to contract, raising concerns about the impact of elevated interest rates on the health of the US economy. The release of the US PCE price index data for July showed a moderation in inflation, but core inflation remained unchanged, suggesting that inflationary pressures could persist.

Geopolitical tensions remain elevated, with the assassination of Hamas leader Ismail Haniyeh in Tehran and the subsequent escalation of tensions between Israel and Hezbollah adding to market volatility. The ongoing war in Ukraine and the escalating US-China trade war also continue to weigh on market sentiment.

This report focuses on the USDCAD, EURUSD, GBPUSD, and AUDUSD currency pairs due to their sensitivity to these global themes and their potential for significant price movements in the coming weeks. These pairs are influenced by a confluence of factors, including monetary policy divergence between central banks, economic data releases, geopolitical developments, and market sentiment.

USDCAD: Riding the Uptrend Amidst Global Uncertainty

The USDCAD pair is typically traded by commodity producers and consumers, hedge funds, and central banks seeking to manage their exposure to the Canadian economy and commodity price fluctuations. Liquidity in this pair is often driven by changes in oil prices, as Canada is a major exporter of raw materials, particularly oil. The USDCAD pair exhibits a strong inverse correlation with oil prices, meaning that when oil prices rise, the Canadian dollar tends to strengthen, leading to a depreciation of the USDCAD pair.

USDCAD's Recent Performance

The USDCAD pair has been on an uptrend during the month to date, rising from 1.3498 to 1.3525. Over the past week, the USDCAD pair has been steady, remaining around the 1.35 level. This stability can be attributed to the recent fluctuations in oil prices and the market's anticipation of the upcoming Federal Reserve interest rate decision.

Theses for the Upcoming Week

Bullish Thesis: The USDCAD pair could continue its recovery in the upcoming week. The recent rebound in oil prices and the potential for a resurgence of risk aversion in global markets could support the US dollar and weigh on the Canadian dollar.

Bearish Thesis: The USDCAD pair could reverse its recent gains and fall in the upcoming week. The market is currently pricing in a high probability of a Federal Reserve rate cut in September, which could further weaken the US dollar and support the Canadian dollar. Additionally, the upcoming release of Canadian GDP data for July could provide further support to the Canadian dollar if the actual result exceeds market expectations.

Conviction Level

The bearish thesis for the USDCAD pair has a moderate conviction level. The dovish outlook on Federal Reserve monetary policy and the potential for further rate cuts, coupled with the robust performance of the Canadian economy, suggest that the Canadian dollar could strengthen against the US dollar in the near term. However, the potential for a resurgence of risk aversion in global markets and the upcoming release of Canadian GDP data pose risks to this outlook. The uptrend observed during the month to date, following a downtrend in the previous month, suggests that the pair could continue its upward trajectory in the upcoming month.

Key Indicators / Events to Watch

• Wednesday, September 4th, Week 36: Canadian Balance of Trade JUL (Canada). The consensus forecast for the Canadian trade balance in July is C$-0.3B. If the actual result is a surplus, it could support the Canadian dollar and weigh on the USDCAD pair.

• Wednesday, September 4th, Week 36: BoC Interest Rate Decision (Canada). The benchmark interest rate in Canada was last recorded at 4.50%. If the BoC cuts rates as expected, it could weaken the Canadian dollar and support the USDCAD pair.

EURUSD: Euro's Steady Strength Amidst ECB's Cautious Easing

The EURUSD pair is typically traded by multinational corporations, hedge funds, and central banks to manage their exposure to the Euro-Area and US economies. High liquidity in this pair is driven by the significant trade volume and investment flows between the two regions. The EURUSD pair exhibits a strong inverse correlation with the US dollar, meaning that when the US dollar weakens, the euro tends to appreciate, leading to an appreciation of the EURUSD pair. The EURUSD pair also reflects the interest rate differentials between the Euro-Area and the US, with higher interest rates in the Euro-Area typically supporting the euro and leading to an appreciation of the EURUSD pair.

EURUSD's Recent Performance

The EURUSD pair has been steady during the week to date, hovering around the 1.10 level. This stability contrasts with the uptrend observed in the previous month, where the pair rose from 1.0787 to 1.1155. The steady performance of the EURUSD pair during the month to date is consistent with the broader trend observed over the past six months, where the pair has traded in a relatively narrow range between 1.06 and 1.12.

Theses for the Upcoming Week

Bullish Thesis: The EURUSD pair could recover from its recent downtrend and continue its upward trajectory in the upcoming week. The market is currently pricing in a high probability of a Federal Reserve rate cut in September, which could further weaken the US dollar and support the euro. Additionally, the upcoming release of Euro-Area GDP data for Q2 could provide further support to the euro if the actual result exceeds market expectations.

Bearish Thesis: The EURUSD pair could extend its downward trend in the upcoming week. The recent strengthening of the US dollar and the potential for a deterioration in the Euro-Area's economic outlook, particularly in light of the unexpected contraction of the German economy in Q2, could weigh on the euro.

Conviction Level

The bullish thesis for the EURUSD pair has moderate conviction. The weakening US dollar, potential Federal Reserve rate cuts, and the ECB's cautious approach to monetary policy suggest continued euro strength against the US dollar in the short term. However, the potential resurgence of risk aversion and the upcoming Euro-Area GDP data release pose risks. The steady performance of the EURUSD pair during the month to date, following an uptrend in the previous month, suggests that the pair could continue its upward trajectory in the upcoming month.

Key Indicators / Events to Watch

• Wednesday, September 4th, Week 36: HCOB Services PMI Final AUG (Euro Area). The consensus forecast for the Eurozone Services PMI in August is 53.3. If the actual result is higher than the forecast, it could support the euro, putting upward pressure on the EURUSD pair.

• Thursday, September 5th, Week 36: Retail Sales MoM JUL (Euro Area). The consensus forecast for Eurozone retail sales in July is 0.10%. If the actual result is higher than the forecast, it could suggest that consumer spending in the Eurozone is stronger than expected, potentially supporting the euro and weighing on the EURUSD pair.

GBPUSD: Pound's Steady Climb Amidst Brexit and BoE Uncertainty

The GBPUSD pair is typically traded by multinational corporations, hedge funds, and central banks seeking to manage their exposure to the UK and US economies. High liquidity in this pair results from the significant trade and investment flows between the two countries. The GBPUSD pair tends to appreciate when the US dollar weakens and reflects the interest rate differentials between the UK and the US, with higher interest rates in the UK typically supporting the British pound and leading to an appreciation of the GBPUSD pair.

GBPUSD's Recent Performance

The GBPUSD pair has been steady during the week to date, hovering around the 1.31 level. This stability contrasts with the uptrend observed in the previous month, where the pair rose from 1.2728 to 1.2852. The steady performance of the GBPUSD pair during the week to date is consistent with the broader trend observed over the past six months, where the pair has risen from a low of 1.2430 to 1.3141.

Theses for the Upcoming Week

Bullish Thesis: The GBPUSD pair could recover from its recent decline and continue its upward trajectory in the upcoming week. The market is currently pricing in a high probability of a Federal Reserve rate cut in September, which could further weaken the US dollar and support the British pound. Additionally, the upcoming release of the UK GDP data for Q2 could provide further support to the British pound if the actual result exceeds market expectations.

Bearish Thesis: The GBPUSD pair could extend its downward trend in the upcoming week. The recent strengthening of the US dollar and the potential for a deterioration in the UK's economic outlook, particularly in light of the ongoing uncertainty surrounding Brexit, could weigh on the British pound.

Conviction Level

The bullish thesis for the GBPUSD pair has a moderate conviction level. The weakening US dollar and the potential for further Federal Reserve rate cuts, coupled with the BoE's cautious approach to monetary policy and the potential for positive surprises in UK economic data, suggest that the British pound could continue to strengthen against the US dollar in the near term. However, the potential for a resurgence of risk aversion in global markets and the upcoming release of the UK GDP data for Q2 pose risks to this outlook. The uptrend observed during the month to date, following an uptrend in the previous month, suggests that the pair could continue its upward trajectory in the upcoming month.

Key Indicators / Events to Watch

• Wednesday, September 4th, Week 36: S&P Global Services PMI Final (United Kingdom). The consensus forecast for the UK Services PMI in July is 53.3. If the actual result is higher than the forecast, it could support the British pound, putting downward pressure on the GBPUSD pair.

• Thursday, September 5th, Week 36: S&P Global Construction PMI (United Kingdom). The consensus forecast for the UK Construction PMI in July is 54.1. If the actual result is higher than the forecast, it could suggest that the UK construction sector is expanding at a faster pace than expected, potentially supporting the British pound and weighing on the GBPUSD pair.

AUDUSD: Aussie's Steady Climb Amidst Chinese Economic Uncertainty

The AUDUSD pair is typically traded by commodity producers and consumers, hedge funds, and central banks seeking to manage their exposure to the Australian economy and commodity price fluctuations. Liquidity in this pair is often driven by changes in commodity prices, as Australia is a major exporter of raw materials, particularly iron ore and coal. The AUDUSD pair exhibits a strong positive correlation with commodity prices, meaning that when commodity prices rise, the Australian dollar tends to strengthen, leading to an appreciation of the AUDUSD pair.

AUDUSD's Recent Performance

The AUDUSD pair has been steady during the week to date, hovering around the 0.68 level. This stability contrasts with the downtrend observed in the previous month, where the pair fell from 0.6795 to 0.6492. The steady performance of the AUDUSD pair during the week to date is consistent with the broader trend observed over the past six months, where the pair has traded in a relatively wide range between 0.64 and 0.68.

Theses for the Upcoming Week

Bullish Thesis: The AUDUSD pair could continue its upward trajectory in the upcoming week. The market is currently pricing in a high probability of a Federal Reserve rate cut in September, which could further weaken the US dollar and support the Australian dollar. Additionally, the upcoming release of the Australian GDP data for Q2 could provide further support to the Australian dollar if the actual result exceeds market expectations.

Bearish Thesis: The AUDUSD pair could retrace its recent gains and fall in the upcoming week. The recent strengthening of the US dollar and the potential for a slowdown in the Chinese economy, which could weigh on commodity prices and the Australian dollar, pose risks to the bullish outlook.

Conviction Level

The bullish thesis for the AUDUSD pair has a moderate conviction level. The weakening US dollar and the potential for further Federal Reserve rate cuts, coupled with the RBA's cautious approach to monetary policy and the potential for positive surprises in Australian economic data, suggest that the Australian dollar could continue to strengthen against the US dollar in the near term. However, the potential for a resurgence of risk aversion in global markets and the uncertainty surrounding the Chinese economy pose risks to this outlook. The steady performance of the AUDUSD pair during the month to date, following a downtrend in the previous month, suggests that the pair could continue its upward trajectory in the upcoming month.

Key Indicators / Events to Watch

• Tuesday, September 3rd, Week 36: S&P Global Manufacturing PMI AUG (Australia). The consensus forecast for the Australian Manufacturing PMI in August is 48. If the actual result is higher than the forecast, it could suggest that the Australian manufacturing sector is expanding at a faster pace than expected, potentially supporting the Australian dollar and weighing on the AUDUSD pair.

• Wednesday, September 4th, Week 36: Australian Balance of Trade JUL (Australia). The consensus forecast for the Australian trade balance in July is A$10.5B. If the actual result is a surplus, it could support the Australian dollar and weigh on the AUDUSD pair.

• Thursday, September 5th, Week 36: Australian Capital Expenditure (Q2 2024). The consensus forecast for Australian capital expenditure in Q2 is -2.20%. If the actual result is higher than the forecast, it could suggest that Australian businesses are becoming more confident about investing, potentially supporting the Australian dollar and weighing on the AUDUSD pair.

Sources

• Bank of England

• Office for National Statistics

• Trading Economics

• BRC - British Retail Consortium

• Confederation of British Industry

• GfK Group

• S&P Global

• Nationwide Building Society

• Office for Budget Responsibility

• Eurostat

• US Bureau of Labor Statistics

• Reserve Bank of Australia

• Australian Bureau of Statistics

• Australian Government

• Westpac Banking Corporation

• Melbourne Institute

• National Australia Bank

• S&P Global

• Australian Industry Group

• CoreLogic

• Bank of Canada

• Statistics Canada

• Department of Finance Canada

• 2024 Third-Quarter Forecast

• 2024 Canadian Federal Budget

• Bloomberg

• Reuters

• OECD

• IMF

• GfK Group

• Ifo Institute

• Centre for European Economic Research (ZEW)

• S&P Global

• Ministère de l'Économie et des Finances, France

• Bundesagentur für Arbeit, Germany

• DARES, France

• Newsquawk

• Stratfor Worldview

• ForexLive