This week our currency strategists focused on the Canada’s CPI Report (October 2024) and U.K. CPI Report (October 2024) for potential high-quality setups.

Out of the eight scenario/price outlook discussions this week, two discussions arguably saw both fundie & technical arguments triggered to become potential candidates for a trade & risk management overlay.  Check out our review on those discussions to see what happened!

Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high quality discretionary trade idea before working on a risk & trade management plan.

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On Monday, our strategists had their sights set on Canada’s CPI report and its potential impact on the Canadian dollar. Based on our Event Guide, expectations were for headline CPI to rise to 1.9% y/y from 1.6%, with core CPI steady at 1.6% y/y. The monthly headline CPI was expected to decline 0.1% after September’s 0.4% drop. With those expectations in mind, here’s what we were thinking:

The “Loonie Lift” Scenario:

If the CPI data came in hotter than expected, we anticipated this could reduce expectations for aggressive BOC rate cuts. We focused on CAD/CHF for potential long strategies if risk sentiment was positive, especially given SNB Chairman Schlegel’s recent comments about potential negative rates. In a risk-off environment, EUR/CAD shorts looked promising given the ECB’s dovish shift and European growth concerns.

The “Loonie Letdown” Scenario:

If inflation data disappointed, showing continued weakness, we thought this could fuel BOC easing expectations. In this case, we considered CAD/JPY for potential short strategies in a risk-off environment, particularly given BOJ rate hike speculation. If risk sentiment stayed positive, GBP/CAD long made sense given the BOE’s gradual approach to future easing.

What Actually Happened

The October CPI report showed stronger-than-expected results across the board:

• Headline CPI rose to 2.0% y/y (vs. 1.9% expected)
• Monthly CPI increased 0.4% (vs. -0.1% expected)
• Core CPI jumped 0.4% m/m (vs. 0.1% forecast)
• All BOC core measures accelerated:
  • Trimmed CPI rose to 2.6% from 2.4%
  • Median CPI increased to 2.5% from 2.3%
  • Common CPI edged up to 2.2% from 2.1%

Market Reaction

This outcome fundamentally triggered our CAD bullish scenarios, and with risk sentiment improving during the U.S. session, CAD/CHF became our focus.

Looking at the CAD/CHF chart, we can see that after an initial chop post data release, buyers stepped in right at the Monday lows, and never really looked back from there. The pair actually hit above the 0.6400 handle before the end of the week with a little help from business sentiment weakness in Europe & dovish comments from SNB Chair Schlegel.

The Verdict

So, how’d we do? Our fundamental analysis anticipated CAD strength on a hotter CPI print, which played out exactly as expected. While our technical analysis accurately identified key pivot levels that served as both support and resistance during the move.

If traders entered long positions near the 0.6300 support after the strong CPI data, they could have captured a solid 100-pip move to the R2 pivot and October highs. Trade management would have been relatively straightforward given the clear upward momentum and technical levels providing guidance.

We were a little late to the party with our own Trade structure case study on the pair, so our conservative entry strategy didn’t get triggered.

Overall, we think this discussion “highly likely” supported a net positive outcome as both fundamental and technical triggers aligned perfectly, showing strong bullish momentum and reaching multiple resistance targets throughout the week.

The key takeaway here is that sometimes when both the fundamental catalyst and technical setup align perfectly, following through with proper trade management can lead to capturing the bulk of a significant move. The combination of stronger inflation data reducing BOC rate cut expectations and clear technical levels made this an exemplary setup for CAD bulls this week.

On Wednesday, our strategists had their sights set on the U.K. CPI report and its potential impact on the British pound. Based on our Event Guide, expectations were for headline CPI to come in at 2.0% y/y and core CPI to hold steady at 3.2% y/y. With those expectations in mind, here’s what we were thinking:

The “Sterling Surge” Scenario:

If the CPI data came in hotter than expected, we anticipated this could reinforce the BOE’s gradual easing approach. We focused on GBP/CHF for potential long strategies if risk sentiment was positive, especially given SNB Chairman Schlegel’s recent comments about cutting rates and curbing franc strength. In a risk-off environment, EUR/GBP short made sense given the ECB’s recent dovish shift and weak eurozone data.

The “Sterling Slump” Scenario:

If U.K. inflation showed significant easing, we thought this could fuel BOE rate cut expectations. We considered GBP/JPY for potential short strategies in a risk-off environment, particularly given BOJ Governor Ueda’s recent hawkish comments about wage-driven inflation. If risk sentiment stayed positive, GBP/NZD shorts looked promising given New Zealand’s recent uptick in inflation expectations.

What Actually Happened

The October CPI report showed inflation rising more than expected:

• Headline CPI jumped to 2.3% y/y (vs 2.0% forecast; 1.7% previous)
• Core inflation increased to 3.3% from 3.2%
• Services inflation climbed to 5.0%, a key concern for the BOE
• Monthly CPI rose 0.6%, up from being unchanged in September
• Housing and household services saw significant increases, with electricity prices rising 7.7%

Market Reaction

This outcome fundamentally triggered our GBP bullish scenarios, and with the euro likely to be weighed down by weak PMI data, EUR/GBP became our focus.

Looking at the EUR/GBP chart, the pair was already rejecting the established resistance area just below R1 (.8390) before the CPI release. After the hotter-than-expected inflation print, bears pushed the pair below the pivot point (.8320), where the market chopped around until Friday’s highly anticipated flash global PMI updates.

That’s where we saw disappointing European flash PMIs send EUR/GBP to S1 Pivot support, only to be turned around by net negative updates from the U.K.

The Verdict

So, how’d we do? Our original discussion was “likely” supportive of a net positive outcome. The fundamental trigger was clear with the significant upside surprise in CPI, while our technical analysis correctly identified key resistance levels.

For traders who executed short positions near the channel resistance after the hot inflation print, they could have captured a solid move down to S1. The trade management would have been relatively straightforward given the clear technical levels and strong fundamental catalysts supporting the move.

In our trade management case study on EUR/GBP, we opted for a conservative entry strategy, waiting for a small bounce before shorting. That was triggered, and we’re currently still holding that position given the monetary policy outlook divergence of the BOE likely slow to cut while the ECB seems to be ready to cut further before the end of the year.

Overall, this discussion saw both fundamental and technical arguments align well, with the pair reaching our discussed support targets while maintaining the broader downtrend structure.