The forex battle for the 49th parallel is shaping up to be hot and heavy through the final full trading week of the year.
As we noted yesterday, tomorrow’s FOMC meeting is, outside of Brexit developments, the biggest event to watch this week, with traders uncertain whether the US central bank will extend the maturity of its asset purchases, expand purchases outright, or stand pat. Any time the market is uncertain about the outcome of an event, it means that a certain subset of traders will be wrong, so we’re expecting volatility in the US dollar regardless of what Powell and Company decide to do tomorrow.
In addition to that key event, traders will also get the latest updates on retail sales out of the US and Canada, Canadian inflation data and US PMI figures, so USD/CAD is poised to see some potentially big moves over the next three days.
Technically speaking, USD/CAD has been trending consistently lower since peaking above 1.4600 in mid-March. Since then, the pair has fallen nearly 2,000 pips to trade near 1.2700, its lowest level in more than 30 months. As of writing, the unit is seeing its third consecutive trading day within Thursday’s 125-pip range, signaling short-term consolidation and the potential for a breakout heading into the latter half of the week:
Source: TradingView, GAIN Capital
The near-term lower highs and higher lows creates a classic “bearish pennant” formation, which, as the name suggests, implies a higher probability of a break lower and continuation of the established trend. However, with rates oversold on the daily chart and major event risks on the horizon, traders may want to wait for confirmation that the pair is breaking lower before considering new short positions.
Alternatively, if we see the Fed stand pat and US data outperform Canada’s over the remainder of the week, there may be an opportunity for nimble traders to buy USD/CAD for a counter-trend bounce toward the 1.2900 or 1.3000 through Christmas week.
Either way, forex traders should have USD/CAD on their radars heading into the holidays!
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