The euro currency is looking at risk against the Canadian dollar after a massive head and shoulders pattern recently formed across the lower times, due to a rebound in commodity-related currencies this week.
Looking at the fundamentals of both the eurozone and the Canadian economy, the Bank of Canada is more likely to reduce QE before the ECB, just on central bank policy the EURCAD pair does look to be a contender for more weakness.
Most economists are anticipating that the Bank of Canada will hold interest and monetary policy steady this month, however, the central bank is likely to taper QE bond purchases again at the September policy meeting, further pressuring the EURCAD lower.
Hence, the recently formed bearish head and shoulders pattern does look ripe to break to the downside. The best trades in the foreign exchange markets, especially cross pair, often have fundamentals and technical aligning.
If we consider that oil prices are starting to rebound then the bear case looks strong for the EURCAD. The Canadian dollar benefits significantly when oil prices are rising. The opposite is also true, with the Canadian dollar cratering last week when WTI and Brent sunk by nearly $10.00.
Something we are seeing now is high levels of positive sentiment towards the EURCAD pair amongst retail participants. According to the ActivTrades market sentiment tool, 85 percent of traders are bullish towards the EURCAD pair.
This is almost certainly an extreme one-way sentiment skew, which does not bode well for the bull case surrounding the EURCAD pair. We should also consider that the short and medium-term trend is bearish.
EURCAD Short-Term Technical Analysis
The four-hour time frame shows that the short-term trend in the EURCAD pair is now bearish after a short-lived price rally towards the 1.5000 level last week.
A massive head and shoulders pattern has now started to form, which according to the overall size of the bearish price pattern is predicting a coming drop towards the 1.4600 support zone.
EURCAD Medium-Term Technical Analysis
Looking at the daily time frame chart, the EURCAD pair remains entrenched in a bearish trend as the price remains capped below its trend defining 200-day moving average.
A bullish triple-bottom pattern has formed, while a clear double-top pattern is also in place. Until we see 1.4600 to 1.5200 price range cracked the EURCAD pair will probably remained capped in this price zone. Once a breakout does take place the EURCAD will probably stage a 500-point move.