USD/CAD Update and Economic Context
The USD/CAD pair reached a new high since August 5 during Tuesday’s Asian session, but it hasn’t consistently drawn in buyers and remains below the mid-1.4000s threshold.
Crude oil prices have rebounded from a low seen a week and a half ago, and this along with the Bank of Canada (BoC) Governor Tiff Macklem’s hawkish remarks, have helped bolster the commodity-linked Loonie while acting as a challenge for the USD/CAD pair. At an event in Nova Scotia, Macklem expressed concerns that sustained high energy costs could drive inflation up, positioning the central bank in a dilemma about whether to maintain or raise interest rates.
Macklem also pointed out that uncertainty surrounding US trade policies has increased risks for businesses, which might hinder the recent gains in the Canadian economy. For context, the US imposed a hefty 50% tariff on around $20 billion of Canadian goods on August 22, while Canada responded with retaliatory tariffs, running from 15% to 50% on a similar value of US goods by September 8. This escalating trade tension contributes to a struggle for the Canadian Dollar (CAD) to attract significant buyers.
On the flip side, the positive sentiment surrounding the US Dollar (USD) means that the USD/CAD pair is likely to trend upward. The US Federal Reserve’s (Fed) hawkish stance suggests at least one more rate hike could happen this year, and the ongoing tensions in the Middle East keep the USD close to its highest point since late July.
Fed’s Hawkish Tone Supports the Dollar
HSBC analysts noted that the USD gained strength after the Fed’s decision, even though the 25 basis points hike was anticipated. They believe the unanimous decision solidifies confidence in the Committee’s tightening approach, highlighting projections that suggest at least one additional hike may occur before year-end. However, they also mention that this outlook remains below current market expectations, leading them to conclude that there shouldn’t be a significant adjustment in rate forecasts or the USD itself.
In recent days, the pullback in oil prices has lessened inflation worries, contributing to lower US bond yields and tempering aggressive buying from USD bulls. Investors are now anticipating a key meeting between US President Donald Trump and Chinese President Xi Jinping this Thursday; along with updates regarding the Middle East crisis, this could bring new momentum to the USD/CAD pair.
USD/CAD Technical Analysis
The USD/CAD pair retains a bullish outlook in the short term, remaining above the 100-day Simple Moving Average (SMA) currently at 1.3953 and the mid-range 50.0% Fibonacci retracement at 1.3992. Spot prices are approaching Fibonacci resistance levels, with the 61.8% retracement at 1.4052. If this resistance is broken, it could pave the way to the next range of resistance around the 78.6% retracement at 1.4138, which would represent a significant challenge for bullish momentum.
On the downside, the first support level appears at the 50.0% retracement level of 1.3992, followed by the 100-day SMA at 1.3953. Should there be a more substantial pullback, buyers might emerge ahead of the 38.2% retracement level at 1.3932 and the 23.6% retracement at 1.3857.
