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USD/CAD at risk of extending downtrend amid FOMC, crude oil rise

The US dollar rebound off multi-year lows last week helped contribute to pullbacks and relative weakness in other key currencies, including the euro, yen, and Australian dollar, among others. The Canadian dollar was no exception, as USD/CAD drifted higher for the past week after hitting a new 2+ year low at 1.2060 slightly over a week ago. This USD/CAD rise has formed a tentative bear flag chart pattern within a strong downtrend that suggests a possible impending continuation of the longstanding bearish trend for the currency pair. This bearish trend has been driven in large part by a surging Canadian dollar boosted by an increasingly hawkish Bank of Canada that unexpectedly raised interest rates earlier this month. Of course, US dollar weakness since the beginning of the year also played a key role in the USD/CAD slide.

This Wednesday will bring the eagerly awaited September FOMC policy decision from the Federal Reserve. Although there are no expectations of a change in interest rates at that time, markets will be most concerned with the Fed’s outlook for interest rates going forward, which will be summarized in the Fed’s “dot-plot,” also to be released on Wednesday. This chart outlines Fed members’ estimates for interest rate changes on the horizon. The Fed’s policy statement, dot-plot, and press conference will occur within the context of last week’s higher-than-expected US consumer inflation data that suggested a potentially higher probability of a Fed rate hike this year.

While this rising inflation data could potentially prompt a hawkish shift in the Fed on Wednesday, any such shift would still occur against the backdrop of a global trend of increasingly hawkish central banks, most notably in this case, the Bank of Canada. The BoC’s relative hawkishness should keep the Canadian dollar well-supported against the US dollar, even if the Fed shifts away from its dovish-leaning stance. Also potentially providing a tailwind for the Canadian dollar against the US dollar has been the recent rise in crude oil. The energy-linked Canadian dollar could get a further boost from rising crude prices. Aside from Wednesday’s FOMC decision, other key events that are likely to impact USD/CAD this week include Friday’s Canadian retail sales and Consumer Price Index inflation data.

From a technical perspective, USD/CAD has been entrenched in a sharp downtrend since early May. Most recently, after the noted Bank of England rate hike, the currency pair extended its fall below the key 1.2400 level and further broke down below 1.2200. Also as noted, since hitting a new 2+ year low at 1.2060 slightly over a week ago, USD/CAD has risen in a tentative bear flag pattern. With any resumption of the entrenched downtrend on a breakdown below the bear flag pattern, the major short-term downside target remains at the key 1.2000 psychological support level.

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