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USD/CAD to Eye 2018-High on Hawkish FOMC Rate Hike

USD/CAD to Eye 2018-High on Hawkish FOMC Rate Hike

David Song, Strategist
Image of USDCAD 2-Hour chart

Fundamental Forecast for Canadian Dollar: Neutral

USD/CAD holds near the monthly-high (1.3067) as the unexpected contraction in Canada Employment dampens bets for an imminent Bank of Canada (BoC) rate-hike, and the pair stands at risk of making a more meaningful run at the 2018-high (1.3125) especially if the Federal Open Market Committee (FOMC) delivers a hawkish rate-hike next week.

All eyes are on the FOMC interest rate decision scheduled for June 13 as the central bank is widely expected to deliver a 25bp rate-hike, and the fresh updates from Chairman Jerome Powell and Co. are likely to influence the near-term outlook for USD/CAD as Fed officials pledge to phase out the forward-guidance for monetary policy.

Image of Fed dot plot

Market participants are likely to turn their attention to the Fed’s longer-run interest rate forecast (dot-plot) as the central bank persistently warns ‘that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate,’ and a material adjustment to reflect a more aggressive hiking-cycle should boost the appeal of the greenback as households and businesses prepare for higher borrowing-costs.

However, recent comments from the FOMC suggest the central bank is in no rush to extend the hiking-cycle as ‘inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term,’ and minor changes in the Summary of Economic Projections (SEP) may drag on the greenback as market participants scale back bets for four rate-hikes in 2018. As a result, ongoing projections for a neutral Fed Funds rate of 2.75% to 3.00% may produce a near-term correction in USD/CAD as it suggests that the FOMC will continue to tolerate above-target price growth for the foreseeable future.

USD/CAD Daily Chart

Image of USDCAD daily chart

Bear in mind, the near-term outlook has become clouded with mixed signals as USD/CAD appears to be stuck in a narrow range, while the Relative Strength Index (RSI) continues to track the bearish formation carried over from earlier this year. With that said, a series of failed attempts to close above the 1.2980 (61.8% retracement) to 1.3030 (50% expansion) region raise the risk for a move towards 1.2830 (38.2% retracement), with a break/close below the state region opening up the 1.2720 (38.2% retracement) to 1.2770 (38.2% expansion). The next downside region of interest comes in around 1.2620 (50% retracement) followed by the overlap around 1.2440 (23.6% expansion) to 1.2510 (78.6% retracement).

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