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USD/CAD analysis before the decision of the Bank of Canada

USD/CAD analysis before the decision of the Bank of Canada

  • The USD/CAD pair is hovering near the lower end of its weekly range around the middle of 1.3350.
  • Betting on a small Fed rate hike continues to put pressure on the US dollar and act like a headwind.
  • The decline appears to have softened as traders await a decision from the Bank of Canada.

USD/CAD is gaining momentum with difficulty and is trading near the bottom of its weekly range during the Asian session on Wednesday. Upside remains limited amid underlying bearish sentiment against the US dollar, which continues to be constrained by stronger expectations of a less aggressive Fed tightening.

Markets appear to be confident that the US central bank will ease its hawkish stance amid signs of easing inflationary pressures and is forecasting a 25 basis point rate cut in February. This, coupled with positive sentiment in Asian stock markets, is putting pressure on the safe-haven dollar and acting as a headwind for the major.

However, the overnight pullback in crude oil prices is undermining the commodity-pegged Canadian dollar and helping to limit losses in USD/CAD, at least for now.

The prospect of a slowdown in global economic growth, along with signs of another major build-up in US inventories, overshadows recent optimism about improving fuel demand in China.

In fact, data from the American Petroleum Institute (API) points to a larger-than-expected increase in US crude inventories of 3.4 million barrels in the week of Jan. 20. This, in turn, may limit the rise in crude oil prices and provide currency support for the USD/CAD pair. Traders also seem reluctant ahead of the Bank of Canada monetary policy meeting.

Canada’s central bank is expected to announce its decision later in the first North American session and propose a 25 basis point rate hike.

Markets, however, are counting on the Bank of Canada to leave interest rates unchanged amid looming recession risks. In addition, the focus will be on the accompanying monetary policy statement and the post-meeting press conference.

This, in turn, should play a key role in determining the short-term trajectory of the Canadian dollar and give momentum to the USD/CAD pair.

Thus, it would be prudent to wait for strong subsequent selling before positioning yourself for another short-term down move in the major currency.

USD/CAD technical overview

From a technical standpoint, last week’s failure to find acceptance above the 100-day SMA suggests that the recent downtrend may be far from over. However, bearish traders may wait for the next drop below the monthly low around 1.3320 before placing new bets.

It is followed by round figure 1.3300, below which USD/CAD could drop to levels below 1.3200. The latter coincides with the all-important 200-day simple moving average, which, if it breaks decisively, will mark a new bearish break and pave the way for further short-term downward movement.

On the other hand, any recovery attempt could continue to attract some sellers around 1.3400. This, in turn, may limit the USD/CAD pair near the weekly high in the 1.3415-1.3420 area.

Some subsequent buying, however, could trigger a short covering rally and send spot prices higher towards the psychological 1.3500 on the way to the 100-day SMA, which is currently in the 1.3515-1.3520 area.

This last level should act as a pivot point which, if resolutely removed, will reverse any negative bias and shift the short-term bias in favor of bullish traders.

Haresh Mengani, CFA, Financial Markets Analyst, FXStreet

Haresh Menghani, Financial Markets Analyst and New Editor joins the FXStreet team after gaining a wealth of 8 years of experience analyzing global financial markets. Haresh holds an MBA and Financial Analysis degree. He also received the title of Certified Financial Analyst (CFA) from the Chartered Financial Analysts Institute of India (ICFAI).

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The opinions expressed here are solely those of the author and do not necessarily reflect the views of Forex Quebec. Every investment and trading move involves risk, so you should do your own research when making a decision.

Disclaimer: The information and opinions contained in this report are for general information only and do not constitute an offer or solicitation to buy or sell foreign exchange contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness and accepts no liability for any direct, indirect or consequential damages that may result from anyone relying to such information.

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