USD to CAD Price Forecast: Weak Outlook as Fed Signals End of Tightening Cycle

Highlights

• USD to CAD weakens as Federal Reserve indicates end of tightening cycle.
• Bank of Canada expected to proceed with second interest rate hike.
• Positive economic indicators drive USD to CAD weakness and potential BoC rate hike.

Overview

The USD to CAD weakened on Tuesday as Federal Reserve officials signaled the nearing end of the central bank’s tightening cycle. However, it traded within a tight range ahead of a crucial U.S. inflation report. Several Fed officials emphasized the need for additional interest rate hikes to combat persistently high inflation. At the same time acknowledging that the end of the current tightening cycle is approaching. Meanwhile, traders prepared for Wednesday’s highly anticipated rate hike by the Bank of Canada.

Federal Reserve Officials Discuss Rate Hikes for Sustainable Inflation

During a Brookings Institute event, Mary Daly, president of the Federal Reserve Bank of San Francisco, stated, “We’re likely to need a couple more rate hikes over the course of this year.” Similarly, Cleveland Fed President Loretta Mester highlighted the importance of higher rates, asserting, “In order to ensure that inflation is on a sustainable and timely path back to 2 percent, my view is that the funds rate will need to move up somewhat further.”

Fed Vice Chair for Supervision Michael Barr emphasized the need for greater capital in large U.S. banks, stating that recent events have underscored the necessity of resilience to both expected and unforeseen risks. Barr outlined a plan to order more capital for these institutions, expressing skepticism about the ability of bank managers or regulators to anticipate all emerging risks.

USD to CAD Testing One-Week Low

As a result of these comments, the USD to CAD dropped to a one-week low of 1.3245, as traders revised their expectations regarding the extent of future U.S. interest rate hikes. Since the Federal Reserve initiated its tightening cycle last year, U.S. interest rate expectations have significantly influenced the performance of the dollar.

BoC Set for Consecutive Rate Hike

In contrast, the Bank of Canada (BoC) is expected to proceed with a second consecutive quarter-point interest rate hike on Wednesday. Economic data from the past month has revealed resilient growth, a persistently tight labor market, and underlying inflation that has proven difficult to shake off. The central bank had previously raised its overnight rate to a 22-year high of 4.75% in June. This was a signal that monetary policy was not restrictive enough. Subsequent moves by the BoC will depend on future economic data.

Short-Term Outlook:  Weak

In summary, the USD to CAD weakened as the Federal Reserve indicated the nearing end of its tightening cycle. The Bank of Canada, on the other hand, is likely to implement another interest rate hike following positive economic indicators.

Technical Analysis

The current USD to CAD market sentiment suggests a slightly bearish outlook. The 4-hour price is lower than the previous close, and it is trading below both the 200-4H and 50-4H moving averages, indicating a bearish trend. The 14-4H RSI is below 50, implying weakening sentiment.

The main support area is between 1.3205 and 1.3226, while the main resistance area is between 1.3360 and 1.3384. Currently, the price is near the support area, suggesting a potential bounce or consolidation. Overall, the market sentiment leans towards bearishness, but close monitoring of price movements and key levels is advised for confirmation.