• EUR/USD constrained between SMAs ahead of ECB policy decision & flash PMIs

• USD/JPY faces limited room for improvement as BoJ rate decision & US data loom

• USD/CAD comes under pressure. Will the BoC policy meeting boost sentiment?

 

ECB policy meeting --> EUR/USD

EUR/USD had a soft positive opening on Monday, gradually approaching the 1.0900 round level as investors awaited a volatile week ahead.

The recent bearish trendline breakout was halted immediately near the 200-day simple moving average (SMA) at 1.0843 last week, restoring some optimism that the pair could return to recovery. But for that to happen, the European Central Bank (ECB) will have to talk against imminent rate cut projections when it meets on Thursday. Inflation is moving in the right direction, but the latest comments from policymakers suggest that the central bank is still concerned about a potential resurgence in prices or some stickiness.

Should the eurozone flash S&P Global business PMI figures for January arrive stronger-than-expected on Wednesday at 09:00 GMT, policymakers might feel more confident about playing down rate cut expectations. Analysts forecast a higher composite index of 48.1, with the manufacturing and services PMI indices edging up to 44.8 and 49.0, respectively.

Technically, the bias remains skewed to the downside and the 50-day SMA is currently threatening a downside correction around the 1.0900 mark. A bounce back above the 20-day SMA might be necessary to reduce negative risks, whilst a break above the long-term descending trendline at 1.1040 could upgrade the outlook.

If the sell-off continues below the 200-day SMA, the pair could retest December’s floor of 1.0725-1.0755.

BoJ meeting, US GDP --> USD/JPY

The yen will be closely watched after its recent depreciation caused some irritation to the Minister of Finance last week. Although his comments increased the odds for some FX intervention, the currency barely gained ground against the US dollar, remaining squeezed slightly below the 150.00 critical mark, as traders have already got used to this verbal technique.

Nevertheless, the BoJ policy announcement will not be ignored on Tuesday. A shift to a more hawkish policy has diminished following the downturn in inflation and the damage from the latest earthquake. Perhaps any adjustments might also be discouraged before the spring wage talks, with investors currently feeling confident that the BoJ will maintain its interest rates steady once again. Still, the central bank has been unpredictable over the past year, and Ueda’s commentary in December suggested that the era of negative rates could soon end.

Hence, any signs the BoJ is setting the ground for a policy change could pressure USD/JPY below the 147.00 barrier and towards the 50-day SMA at 146.00, as overbought signals are present. Even lower, the bearish action could take a breather around the 20-day SMA and the 144.70 level.

Data releases out of the US might affect market sentiment too. Flash S&P Global PMI data will be out on Wednesday, followed by GDP growth figures on Thursday and the core PCE inflation on Friday. Any positive surprises could empower the greenback above the 150.00 number, likely bringing the 2022 ceiling of 151.93 back under the spotlight.

BoC policy meeting --> USD/CAD

Loonie pairs will come under the limelight on Wednesday when the Bank of Canada (BoC) announces its rate decision, releases new economic projections, and holds a press conference. Headline inflation is marginally above the central bank’s 1-3% range target, while the core measure is within the range at 2.6% y/y, making a switch to a dovish policy an easier decision. That said, persisting upside pressures in housing prices and wages might keep policymakers on the sidelines until there is enough evidence inflation has sustainably returned to the 2.0% midpoint target.

In the meantime, Friday’s close below 1.3450 could produce more bearish actions in USD/CAD, sending the pair likely down to 1.3360 as the technical indicators indicate increasing selling pressures.

On the upside, the pair will need a close above the constraining 50-day SMA and a rally above the 1.3500-1.3537 resistance zone to bring the bulls back into play.