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USD/CAD Risks Larger Correction as RSI Divergence Takes Shape

USD/CAD Risks Larger Correction as RSI Divergence Takes Shape

Talking Points:

- GBP/USD Snaps Bearish RSI Formation, Topside Targets in Focus Ahead of BoE.

- USD/CAD Risks Larger Correction as RSI Divergence Takes Shape, BoC Defends September Rate-Hike.

- Sign Up for the DailyFX Trading Webinars for an opportunity to discuss potential trade setups.

DailyFX Table
TickerLastHighLowDaily Change (pip)Daily Range (pip)

The British Pound outperforms its major counterparts following a pickup in the U.K. Consumer Price Index (CPI), with GBP/USD at risk of staging a larger advance should the Bank of England (BoE) alter the outlook for monetary policy.

Even though the BoE is widely anticipated to retain the current stance at the September 14 meeting, a growing number of central bank officials may argue ‘the withdrawal of part of the stimulus that the Committee had injected in August last year would help to moderate the inflation overshoot while leaving monetary policy very supportive’ as price growth is expected to hold above the 2% target throughout the policy horizon. In turn, Governor Mark Carney And Co. may increase their efforts to prepare U.K. households and businesses for higher borrowing-costs, and the British Pound may continue to gain ground over the next 24-hours of trade especially as the U.K. Jobless Claims report is anticipated to show Average Hourly Earnings picking up for the third consecutive month in July.

Keep in mind, the BoE meeting minutes are likely to reveal a 7 to 2 split within the central bank as Sir David Ramsden joins the Monetary Policy Committee (MPC).

GBP/USD Daily Chart

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  • Topside targets remain on the radar for GBP/USD as clears the August-high (1.3268), while the Relative Strength Index (RSI) clears the bearish formation from May and pushes into overbought territory.
  • Need a break/close above the 1.3300 (100% expansion) handle to open up the 1.3370 (78.6% expansion) hurdle, with the next region of interest coming in around 1.3460 (50% retracement), which sits just above the September 2016-high (1.3445).
TickerLastHighLowDaily Change (pip)Daily Range (pip)

USD/CAD trades in a narrow range after failing to close below the 1.2080 (61.8% expansion) hurdle, and the pair may face a near-term correction as the bearish momentum appears to be tapering off.

The broader outlook for the Canadian dollar remains constructive as the Bank of Canada (BoC) appears to be on course to further normalize monetary policy over the coming months, with the central bank noting ‘a much higher percentage of trading desks were correctly interpreting the Bank’s prior messaging that monetary policy would be forward-looking and data dependent, not predetermined’ amid the mixed feedback following the September 6 rate-hike. In turn, Governor Stephen Poloz and Co. may continue to normalize monetary policy over the coming months as ‘the level of GDP is now higher than the Bank had expected,’ but the central bank may move to the sidelines at the next meeting on October 25 as ‘future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation.’

USD/CAD Daily Chart

Chart - Created Using Trading View

  • USD/CAD may stage a larger rebound as the 1.2080 (61.8% expansion) hurdle offers near-term support, while the Relative Strength Index (RSI) appears to be deviating with price as it fails to mark a fresh 2017-low.
  • Topside targets are back on the radar as the RSI bounces back from oversold territory, with a break/close above the Fibonacci overlap around 1.2210 (50% expansion) to 1.2230 (50% retracement) opening up the 1.2350 (38.2% expansion) hurdle followed by the former-support zone around 1.2440 (23.6% expansion).

Retail Sentiment

Retail Sentiment

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  • Retail trader data shows 31.3% of traders are net-long GBP/USD with the ratio of traders short to long at 2.19 to 1. In fact, traders have remained net-short since September 05 when GBP/USD traded near 1.30402; price has moved 1.8% higher since then. The number of traders net-long is 0.3% lower than yesterday and 24.6% lower from last week, while the number of traders net-short is 1.9% higher than yesterday and 52.7% higher from last week.
  • Retail trader data shows 71.6% of traders are net-long USD/CAD with the ratio of traders long to short at 2.52 to 1. In fact, traders have remained net-long since June 07 when USD/CAD traded near 1.3514; price has moved 10.2% lower since then. The number of traders net-long is 5.0% higher than yesterday and 8.3% higher from last week, while the number of traders net-short is 22.2% lower than yesterday and 24.0% lower from last week.
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--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.