Canadian Dollar Price Outlook:
- USD/CAD trades narrowly above support around 1.3340 ahead of Wednesday’s FOMC rate decision
- The central bank meeting could set the stage for further USD weakness or spark an abrupt reversal
- Market Cycles | Phases, Stages, and Common Characteristics
Canadian Dollar Forecast: USD/CAD Threatens Breakdown Ahead of Fed
US Dollar weakness has been a prevalent theme in capital markets as of late, as the world’s reserve currency continues its downward spiral and other assets, commodities and currencies gain as a result. USD/CAD is no exception as the pair recently fell to its lowest level since early June. Prior to the swing low in June, the 1.3340 level in USD/CAD has not been seen since the early stages of the coronavirus crash in March.
USD/CAD Price Chart: 4 - Hour Time Frame (January 2020 – July 2020)
While recent price action and movement in other markets may suggest a further decline in the USD/CAD exchange rate, the looming Federal Open Market Committee meeting on Wednesday has potential to shake up the pair’s outlook. As it stands, analysts have asserted US Dollar weakness has been derived from the Fed’s willingness to offer accommodative monetary policy and expand its balance sheet. Thus, an event at which this trend could change possesses huge influence over the Greenback.
| Change in | Longs | Shorts | OI |
| Daily | -2% | 7% | 5% |
| Weekly | -30% | 38% | 13% |
With that in mind, USD bulls will look for any indication in either action or language from the Fed that would suggest the tap is being turned off and the flow of Dollars into the market will slow. I would argue this is rather unlikely at this stage as few Fed members have suggested as much, and as a result, market expectations are likely keyed into this theme as well.
USD/CAD Price Chart: 1 - Hour Time Frame (May - July)
Therefore, a surprise shift to the hawkish side could spark a quick Dollar rally, but betting on an unlikely outcome as the pair grasps at support seems to rely heavily on hope – a poor strategy to be sure. Consequently, the meeting may fail to deliver a massive shock of volatility if outcomes align with expectations, but it may allow for a continuation downward in USD/CAD in the weeks ahead.
4 Steps to Trading Forex Break Outs
Since price currently resides on potential support, levels of invalidation can be set slightly above recent swing highs, while areas of interest take shape beneath the 1.33 area. Regardless of the Fed’s eventual action, price progression often slows ahead of major events as traders seek to avoid event risk, so a continuation of the norm and passing of event risk could see USD/CAD continue lower. For further updates and analysis, follow @PeterHanksFX on Twitter.
--Written by Peter Hanks, Strategist for DailyFX.com
Contact and follow Peter on Twitter @PeterHanksFX
