On Thursday, the US dollar pared much of the gains it had made in the immediate aftermath of Wednesday’s FOMC policy announcement, in which the Fed sounded a relatively hawkish tone regarding the path of future interest rates and stimulus reduction. That decision increased the market-viewed probability of a December Fed rate hike to above 70% from the sub-60% where it had been prior to the FOMC statement. Despite the sharp boost to the US dollar as a result of this hawkish-leaning policy stance, the USD/CAD currency pair faces some significant headwinds from both fundamental and technical perspectives.
Although the Fed has appeared to confirm further policy tightening during the balance of this year and into next year, this pace of tightening has essentially been the plan for quite some time already. The US dollar boost after Wednesday’s FOMC decision was partly driven by a dispelling of notions that the Fed had become more dovish. The relative lack of dovishness on Wednesday helped prompt the dollar surge.
With respect to USD/CAD, the US dollar may have a hard time competing against the strength of the Canadian dollar, which has been helped along by an increasingly hawkish Bank of Canada that unexpectedly raised interest rates earlier this month. 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.
The end of this week brings some key economic data releases that could also make a significant impact on USD/CAD, including Canadian retail sales and Consumer Price Index (CPI) inflation data on Friday. Monthly CPI for August is expected to have increased by 0.2% after the previous month’s in-line 0.0% change in consumer prices. Retail sales for July is expected to have increased by 0.2% while core retail sales (excluding automobiles) is expected at 0.4%.
Technically, the trend for USD/CAD remains strongly to the downside despite the recent relief rally from multi-year lows that has been in place for the past two weeks. Wednesday’s Fed-driven US dollar rally boosted USD/CAD to approach the critical 1.2400 level, which has become key resistance after previously serving as support for the late-July lows. If USD/CAD remains below this resistance, a turn back to the downside is likely, with an initial downside target at the 1.2200 level. With any resumption of the entrenched downtrend, the next major downside target below the noted multi-year lows is at the key 1.2000 psychological support level.