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USD/CAD forms major bottoming pattern ahead of FOMC minutes

Since establishing a two-year low just above the 1.2400 handle in late July, USD/CAD has formed a clear reversal pattern – a V-bottom – characterized by a sharp bullish reversal resembling the letter, “V.” USD/CAD often tends to switch directions with this type of an abrupt reversal pattern, as the beginnings of trend changes in this currency pair can be relatively swift events. Currently, this reversal pattern has pushed USD/CAD up to approach the key 1.2800 level, which is also where the 50-day moving average currently resides.

This week, the short-term trajectory for the currency pair will depend to a large extent on how the markets interpret the Federal Reserve’s latest monetary policy stance when the minutes of the late-July FOMC meeting are released on Wednesday. Any hawkish nuances from the minutes could transform what was considered a relatively dovish meeting at the time into new-found fuel for the battered US dollar.

Also featured this week will be key inflation data from Canada in the form of July’s Consumer Price Index (CPI). Prices are expected to have remained steady after the previous month’s -0.1% drop. Another lower-than-expected CPI reading could weigh further on the Canadian dollar, boosting USD/CAD even more. Also potentially supportive of USD/CAD would be extended pressure on crude oil prices, which could continue to weigh on the energy-correlated Canadian dollar.

As noted, the recent rise of USD/CAD in the past two weeks has brought the currency pair up to approach key resistance around the 1.2800 handle and the 50-day moving average. If a continued rise for the pair amid this week’s critical economic events is able to overcome this resistance, it would confirm the strength of the current bullish reversal, potentially propelling USD/CAD back up to the key 1.3000 psychological level.

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