Canadian Dollar Outlook: USD/CAD Breaks 200-Day Ahead of Fed and BoC

Risks to guide BoC policy

Before the Fed decision, the Bank of Canada is also widely expected to cut rates by 25bp, taking its policy rate to 2.25% as it looks to cushion an economy hit hard by trade uncertainty and weak private demand. Swaps imply an 86% chance of a move at this meeting and around a one-in-five chance of another cut in December.

Despite inflation accelerating and core measures remaining above 3%, the bank’s focus appears to have shifted toward managing downside risks rather than reacting to data. Governor Tiff Macklem said last week the BoC would be “putting more emphasis on potential risks” when setting policy, noting there was “a lot of uncertainty” and that officials “will have to be humble about our forecast.” That suggests policy may favour of supporting growth at the expense of tackling inflation, as seen with a number of other G10 central banks recently.

Prime Minister Carney’s upcoming budget is expected to boost spending and widen the deficit, but it’s unlikely to offset weakness across the private sector. With trade tensions escalating and business confidence sliding, policymakers look set to prioritise risk management over inflation control for now.

Rates Reaction May Not Last Long

While correlation analysis indicates that optimism over a lasting US-Canada trade truce ahead of this week’s Trump–Xi meeting has been the dominant driver of USD/CAD recently, similar to patterns observed in other cyclical currencies such as the Australian and New Zealand dollars, today’s policy decisions remain highly relevant. Both the Fed and BoC could still move the dial, particularly if either delivers a surprise or attempts to steer market expectations further along the curve. However, while a spike in volatility is likely, the longer term influence on USD/CAD may be limited. 

USD/CAD Slices Through 200DMA

Source: TradingView

From a technical standpoint, the short-term directional bias for USD/CAD is now swinging lower. While the longer-term uptrend remains firmly in place, the pair now finds itself in a minor downtrend, grinding lower for much of the past few weeks. Ahead of the FOMC and BoC decisions, the latest leg lower through minor support at 1.3980 saw it breach and close beneath the 200-day moving average.

One glance at the charts underlines just how important the level has been this year, capping and supporting the price for long periods once crossed. Now sitting above the pair with a negative slope, it may embolden bears to seek out further downside, allowing for setups where stops can be placed above it to protect against the risk of an abrupt reversal. For those considering bearish setups on the break, the preference would be to see a retest and rejection at the 200-day moving average before entry, with a sustained push beneath 1.3940 only enhancing the merits of the trade.

1.3900 looms as an initial target given it acted as both support and resistance earlier this year. With the 50-day moving average found just below it, the confluence of these levels will likely provide a decent hurdle for bears, should the price get there. 1.3830 is a minor level found below with the July uptrend sitting around the same region today.

Should the break of the 200-day moving average prove to be a bear trap with a reversal soon to follow, the favoured bearish setup could be flipped, allowing for longs to be established above with a stop below for protection. Again, if a reversal were to take place, the preference would be to see a back-test and bounce from the 200-day before entering the trade. 1.3980 looms as the first potential target with 1.4050 and 1.4080 options after that.

The momentum picture has changed noticeably over the past fortnight, with RSI (14) now trending lower beneath 50, indicating slowly building downside pressure. MACD has also staged a bearish crossover of the signal line but remains in positive territory, providing a cautionary message to bulls that directional strength is shifting.