Last week, the Federal
Reserve decided to pause its tightening cycle, maintaining interest rates at a
range of 5.00-5.25%. The Federal Open Market Committee (FOMC) is awaiting
further economic data before determining whether to implement another rate
increase. Their aim is to carefully adjust their policy, aiming for a
sufficiently restrictive level that can reduce inflation without causing
significant economic hardship.
In contrast, the Bank of
Canada (BoC) surprised the markets by raising interest rates recently. This
decision stems from their dissatisfaction with the disinflationary trend
observed during the first quarter of 2023. The BoC deemed it appropriate to
increase the interest rate to address this concern. This divergence in monetary
policy had a positive impact on the Canadian Dollar and resulted in the
breakout of the key support level at 1.32.
USDCAD Technical Analysis –
Daily Timeframe
USDCAD Daily
On the daily chart, we can see that USDCAD is
trading below the key 1.3225 support and it’s
now pulling back in what could be a classic “break and retest” trade. In fact,
we are likely to find sellers leaning on that 1.3225 resistance where we will
also find the blue 8 moving average for confluence. On the
downside, the target should be the 1.30 handle. The buyers, on the other hand,
will need to break above the 1.3225 level to start getting some conviction for
more upside and target the 1.34 handle.
USDCAD Technical Analysis –
4 hour Timeframe
USDCAD 4 hour
On the 4 hour chart, we can see that the whole move
lower since the 1.34 level has been diverging with the
MACD. This is
generally a sign of weakening momentum often followed by pullbacks or
reversals. In this case, the pullback should end at the downward trendline where
there’s also the previously mentioned 1.3225 resistance and daily 8 moving
average. If the sellers fail at this resistance zone and the price breaks out,
the buyers are likely to pile in with more conviction and target the 1.34
handle.
USDCAD Technical Analysis –
1 hour Timeframe
USDCAD 1 hour
On the 1 hour chart, we can see that for
further confluence, we also have the 61.8% Fibonacci
retracement level at the 1.3225 resistance. This zone
will be a make it or break it moment for the sellers as a move above the
trendline would invalidate the bearish setup and lead to a squeeze higher.
Today, we will see the
US PMIs and it’s likely that higher than expected data leads to US Dollar
strength as the market would price in more hikes, and lower than expected
figures lead to more weakness in the USD as the market would price out the July
hike.
See also the video below: