Canadian Dollar Talking Points

USD/CAD pulls back above the 50-day SMA (1.2854) as it rebounds from a fresh monthly low (1.2816), and the Federal Reserve’s interest rate decision may hold the exchange rate above the moving average, as the central bank is expected to deliver another rate hike of 75 basis points.

USD/CAD Recovers Above 50-Day SMA Ahead of Fed Rate Decision

USD/CAD tries to retrace the decline from the start of the week despite the larger than expected drop in the Conference Board Consumer Confidence Surveyand the Fed’s hike cycle could keep the exchange rate afloat as the US central bank adjusts monetary policy faster than its Canadian counterpart.

Consequently, the Federal Open Market Committee (FOMC) the rate decision could generate a bullish reaction on the USD/CAD as the central bank prepares American households and businesses for a restrictive policy, and the exchange rate could continue to trade at new yearly highs in the coming months if the committee maintains its current approach to fighting inflation.

Image of the Atlanta Fed's GDPNow model

Source: Atlanta Fed

However, the growing threat of a recession could force the FOMC to offer lower rate hikes, as the Atlanta Fed’s GDPNow model indicates that the “the estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is -1.6% on July 19, compared to -1.5% on July 15“, and a shift in the Fed’s forward guidance could produce headwinds for the U.S. dollar if the president Jerome Powell and Co. are looking to reduce the hiking cycle over the next few months.

In turn, USD/CAD could mirror the price action from May if it struggles to hold above the 50-day SMA (1.2854), and a further rate cut Foreign exchange could fuel the shift in retailer sentiment like the behavior seen earlier this year.

Image of IG client sentiment for USD/CAD rate

The IG Customer Opinion Report shows 61.34% of traders are currently long fillet USD/CAD, with the ratio of long to short traders upright at 1.59 to 1.

The number of net long traders is 6.30% higher than yesterday and 21.88% higher than last week, while the number of net short traders is 3.04% lower than yesterday. yesterday and 7.14% lower than last week. The jump in net buying interest fueled the reversal in retailer sentiment, with 60.19% of traders net long USD/CAD last week, while the drop in the short position net comes as the exchange rate rebounds. from a new monthly low (1.2816).

That said, the Fed’s rate decision could keep USD/CAD above the 50-day SMA (1.2854) as long as the central bank maintains the current course of monetary policy, but the exchange rate can largely reflect price developments from May onwards if it fails to hold above the moving average.

USD/CAD daily rate chart

Image of daily USD/CAD rate chart

Source: Commercial view

  • Keep in mind that the failed attempt to test the November 2020 high (1.3371) has resulted in a short-term pullback for USD/CAD, with the exchange rate now trading above the SMA at 50 days (1.2854) after struggling to close below Fibonacci overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion).
  • In turn, USD/CAD may push down 1.2980 area (618% retracement) as it tries to retrace the decline since the beginning of the week, but the exchange rate can largely mirror the price action from May if it struggles to hold above the moving average.
  • A fence below the overlap around 1.2830 (38.2% retracement) to 1.2880 (61.8% expansion) bring the 1.2770 (38.2% expansion) on the radar, with a cross below the 200-day SMA (1.2713) opening the region from 1.2610 (50% retracement) to 1.2650 (78.6% expansion).
  • Need a break/close above 1.2980 (618% retracement) bring the Region from 1.3030 (50% expansion) to 1.3040 (50% expansion) back on the radar, with the next area of ​​interest around the 1.3200 handle (38.2% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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