The USDCAD currency pair has encountered a recent downward trajectory, primarily swayed by the Greenback’s weakening stance in the markets.
Last week witnessed a 1.57% decline, attributed to a dovish shift by the Federal Reserve. The Fed’s optimism about curbing inflation and stabilizing the labour market sparked hints of potential rate cuts at the start of the upcoming year, amplifying market expectations of a 66.7% likelihood of reduced rates post-March.
Today’s focus shifts to Canada’s inflation data, which is anticipated to decrease by 20 basis points to 2.9%, according to Statistics Canada. However, the pivotal event of the week is the eagerly awaited PCE Index—the Federal Reserve’s preferred inflation indicator—scheduled for release on Friday. Forecasts indicate a further deceleration in U.S. inflation, tapering to 2.8%. Should this closely align with the 2% target, it could exert significant pressure on the Greenback, potentially increasing the likelihood of imminent rate cuts. Such a scenario might pave the way for an extended descent of the USDCAD pair.
Technical
In Monday’s trading session, the USDCAD pair broke free from a three-day losing streak, nudging upwards by a modest 17 basis points. However, the broader trend leans towards a downtrend, notably marked by a breach below both an ascending channel and the 100-day moving average on the daily timeframe.
At the recent high of 1.36066, a resistance level emerged following a minor rally that saw the pair briefly converging with the 100-day moving average before succumbing to downward pressures. Presently, the pair finds itself at a critical juncture, aligning with a major support level at 1.33720, originating from the Greenback’s rally back in September.
The current oversold conditions at this support level hint at the potential for a reversal. If bullish sentiment prevails, triggering a rebound, the 1.36066 level could act as an area of interest, signalling upside momentum favouring the Greenback against the Canadian Dollar.
Conversely, a substantial breakdown with heightened trading volumes below this level could signify the dominance of bearish forces, opening the door to further downside movements. In such a scenario, the focus might shift to the next significant support point at 1.31511, formed back in July.
Summary
The USDCAD pair stands at a pivotal juncture, swayed by dovish Fed sentiments and economic data. With hints of potential rate cuts looming, upcoming inflation reports hold immense sway over the Greenback’s fate. Technical indicators underscore a battleground scenario, with key levels dictating possible reversals or extensions in this tug-of-war between the currencies.
Sources: CME, Statistics Canada, U.S. Bureau of Economic Analysis, Reuters, TradingView
Piece Written By Nkosilathi Dube, Trive Financial Market Analyst
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