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Hawkish Fed Rhetoric to Fuel USD/CAD Recovery; August-High on Tap?

Hawkish Fed Rhetoric to Fuel USD/CAD Recovery; August-High on Tap?

David Song,

Talking Points:

- GBP/USD Snaps Bearish Sequence, Fails to Test 100-Day SMA (1.3017).

- Hawkish Fed Rhetoric to Fuel USD/CAD Recovery; August-High on Tap?

- Sign Up & Join DailyFX Currency Analyst David Song to Discuss Key FX Themes & Potential Trade Setups.


GBP/USD has staged a meaningful correction off of 2017-high (1.3657), with the broader outlook clouded by the Brexit negotiations, but the pair may regain its footing ahead of the next Bank of England (BoE) interest rate decision on November 2 as the central bank shows a greater willingness to move away from its easing cycle.

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Market participants may pay increased attention to Governor Mark Carney and Co. as a growing number of Monetary Policy Committee (MPC) officials adopt a hawkish tone, and signs of stronger-than-expected growth may encourage the BoE to alter the monetary policy outlook as board member Ian McCafferty argues ‘the little slack that currently remains is likely to disappear quite quickly, while inflation is projected to persistently overshoot the target.’ In turn, a majority of the MPC may vote in favor to remove the record-low interest as a ‘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.’

Keep in mind, the BoE may continue to tame the longer-term outlook for the benchmark interest rate especially as Prime Minister Theresa May faces a growing risk of losing the U.K. leadership, but the broader shift in GBP/USD may continue to take shape over the remainder of the year as the pair extends the upward trend from earlier this year.

GBP/USD Daily Chart

GBP/USD Daily Chart
  • GBP/USD may continue to retrace the decline from earlier this month as it snaps the series of lower highs & lows from the previous week and fails to test the 100-Day SMA (1.3017).
  • Break/close above the 1.3210 (50% retracement) hurdle opens up the next region of interest around 1.3300 (100% expansion) to 1.3320 (38.2% retracement).
  • Keeping a close eye on the Relative Strength Index (RSI) as the oscillator preserves the bearish formation carried over from September, but the momentum indicator appears to be highlighting a similar dynamic as price as it appears to be turning around ahead of oversold territory.

USD/CAD may continue to retrace the decline from the summer months as it extends the bullish formation carried over from September, while the Federal Open Market Committee (FOMC) appears to be on course to deliver three rate-hikes in 2017.

The slew of fresh rhetoric coming out of the Federal Reserve may continue to heighten the appeal of the U.S. dollar as Fed Fund Futures now highlight a greater than 80% probability for a December rate-hike, and central bank officials may prepare households and businesses for higher borrowing-costs as the U.S. Non-Farm Payrolls (NFP) report boosts the outlook for growth and inflation. In contrast, comments from Bank of Canada (BoC) Deputy Governor Carolyn Wilkins may drag on the local currency as the central bank start to soften its hawkish tone, and Governor Stephen Poloz and Co. may largely endorse a wait-and-see approach over the remainder of the year as ‘there remains some excess capacity in Canada’s labour market, and wage and price pressures are still more subdued than historical relationships would suggest.’

USD/CAD Daily Chart

USD/CAD Daily Chart

Chart - Created Using Trading View

  • Even though USD/CAD fails to extend the series of higher highs & lows from the previous week, topside targets remain on the radar as long as the pair holds above the 1.2510 (78.6% retracement) hurdle.
  • Break/close above the 1.2620 (50% retracement) region raises the risk for a run at the Fibonacci overlap around 1.2770 (38.2% expansion) to 1.2830 (38.2% retracement), which largely lines up with the August-high (1.2778).
  • Watching the Relative Strength Index (RSI) as it approaches overbought territory, with a break above 70 raising the risk for a larger advance in the exchange rate as the bullish momentum gathers pace.
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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.