FOREX: EURUSD Rally Gathers Momentum, Approaches 1.0800 Mark

• RES 4: 1.0533 High Jan 27 and a key resistance   
• RES 3: 1.0450 50-day EMA
• RES 2: 1.0350 Low Jan 31 and a gap high on the daily chart  
• RES 1: 1.0335 High Feb 3
• PRICE: 1.0304 @ 16:44 GMT Feb 3 
• SUP 1: 1.0138 1.764 proj of the Sep 25 - Oct 23 - Nov 5 price swing
• SUP 2: 1.0031 2.00 proj of the Sep 25 - Oct 23 - Nov 5 price swing
• SUP 3: 1.0000 Psychological round number  
• SUP 4: 0.9947 76.4% of the Sep 28 ‘22 - Jul 18’23 bull leg 

EURUSD is trading in a volatile manner. Monday’s gap lower and fresh cycle low, highlights a resumption of the downtrend. Moving average studies are in a bear-mode position and attention is on 1.0138, the 1.764 projection of the Sep 25 - Oct 23 - Nov 5 price swing. Clearance of this level would open 1.0031, the 2.00 projection. Initial resistance is at 1.0335, Monday’s intraday high and a gap low on the daily chart.     

• i) Any intermeeting cut would likely be larger than 25bp otherwise it’s hard to justify, but such a move when coming as a complete surprise would risk a further slide in the Canadian dollar as investors see the BoC panicking. USDCAD has pulled back to 1.4600 (~100 pips of which came following the Mexico news) after almost touching 1.48 overnight for highs since 2003.
• ii) The Bank has in its words cut a “substantial” 200bp since June which have started to support the economy. It’s taken the overnight rate target to 3% for within the 2.25-3.25% estimated range for neutral (a rate that has a chance of being revised higher again in the April MPR when it’s set for its annual estimation).
• iii) Last week’s 25bp cut was painted as a risk management approach in the face of tariff uncertainty whilst Governor Macklem also pointed to a stepping up of outreach activities with businesses and households to see how they were responding to any potential tariffs in real time (MNI BoC Review from the Wed decision here:).
• iv) Canadian government retaliation keeps an inflation angle at play, pushing for 25% tariffs on C$155bn of US goods (C$30bn effective Tue before the remaining C$125bn in three weeks to allow businesses time to prepare).

• US President Trump’s unveiling of 25% tariffs on Canada (with only limited carve-outs of 10% for energy) saw odds of an intermeeting cut from the BoC rise with one-month OIS showing sustained readings of 4-5bp of cuts.
• That has since pushed back to 2bp of cuts with optimism that Canada will see a repeat of the one-month delay Mexico negotiated earlier today. Trump and Trudeau talked earlier today and have another call set for 1500ET – should nothing concrete come of it it’s possible that we start to see a move back towards the 4-5bp of cuts.
• We think those levels overplay the likelihood of a BoC inter-meeting cut for various reasons (below) and see the 25bp cut priced for the actual next meeting on Mar 12 as a better indication of the BoC’s path from here.
• Whilst still almost six weeks away, this gives the Bank time to assess any changes, including a potential fiscal response which is still unclear for now. Should it then need to, it could always return to the 50bp cuts seen in Oct and Dec but in a more controlled manner than surprising inter-meeting.