Summary:

The ECB is expected to cut rates by 25 basis points this week. However, with improving economic conditions in the Eurozone and persistent wage and service inflation, further cuts are unlikely. As a result, the ECB is anticipated to deliver a 'hawkish cut' and revise their economic projections upwards during the meeting. Conversely, the markets expect the BoC to cut rates today, given recent encouraging inflation data and a GDP report indicating the need for a rate reduction.

EUR/CAD 4H

Macro View:

EUR: Currently, markets are anticipating the ECB will deliver a 25bps cut in the June meeting. This expectation has been confirmed by ECB policymakers and the encouraging disinflation process over the past few months. Despite an uptick in May inflation, it is not seen as a game-changer for the ECB's decision to cut rates. However, as economic conditions continue to improve in the Eurozone, markets are reassessing their policy outlook for both the ECB and the Fed, leading participants to pare back their ECB rate cut expectations. Additionally, a few ECB policymakers mentioned that although the June cut is a done deal, they cannot commit to further cuts due to persistent wage and service inflation. In summary, despite the June cut being certain, the improving economic conditions and sticky wage and service inflation suggest that markets are anticipating upward revisions to both inflation and GDP, potentially resulting in a 'hawkish cut' from the ECB.

CAD: The Canadian rate market now anticipates a higher probability of an earlier rate cut this week from the BoC following the release of April's inflation data. The report revealed that core inflation surprised to the downside for the fourth consecutive month this year. The average of the core CPI measures (trim & median) slowed further to an annual rate of 2.8% in April from 3.1% in March. With inflation moving closer to the BoC’s target and Canada's economy growing below potential, there is now room for the BoC to make their policy rate less restrictive. As a result, markets expect the first BoC rate cut today at the June policy meeting.

Keep in mind that the BoC meeting will occur at 20:30 GMT+8. If the BoC doesn't cut rates today, this expectation will become invalid immediately. However, even if the BoC doesn't cut rates today, markets believe this won't significantly change the overall fundamentals for the CAD, and they still expect a rate cut in July.

FX View:

DXM: A Tool to Gauge Retail Sentiments

EUR/CAD Current Retail Long/Short Position

The DXM shows that 8% of traders are bullish, while the remaining 92% are bearish, reflecting the predominant retail sentiment. This sentiment offers a contrasting trading opportunity since retail traders tend to consistently lose money in the long term.

Seasonality Analysis: The Historical Movement of the Currencies

EUR Futures’ seasonality movement

The seasonal pattern for the EUR suggests bullish momentum in the near term 

CAD Futures’ seasonality movement

The seasonal pattern for the CAD suggests bearish momentum in the near term.

Sources: Prime Market Terminal

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