USD to CAD Price Forecast: Weaker after Fed Chair Powell Strikes Balanced Tone

Highlights

• USD to CAD declines after Federal Reserve’s rate increase.
• Bank of Canada exercises caution on further rate hikes.
• Inflation concerns persist for the Bank of Canada.

Overview

The USD to CAD exchange rate faced a decline on Thursday following the Federal Reserve’s decision to raise interest rates by a quarter percentage point in the previous session. The move was justified by the continued elevation of inflation, leading to the highest U.S. central bank policy rate in 16 years, now ranging between 5.25% – 5.50%. While the Fed’s policy statement left room for another increase, futures are anticipating the overnight rate to remain above 5% until June 2024.

Powell’s Balanced Tone Spurs Dollar Decline

During the FOMC meeting, Chair Jerome Powell struck a balanced tone, not leaning heavily towards hawkish or dovish outlooks on interest rates going forward. Expressing confidence in a possible soft landing for the economy, Powell also kept the option open for further rate hikes. However, the lack of overt hawkishness from his end led to a decline in the dollar, driving the USD to CAD exchange rate lower after the meeting and press conference.

Bank of Canada Cautious on Rate Hikes

On a separate note, the Bank of Canada is exercising caution regarding further interest rate hikes. While it raised the key interest rate by a quarter percentage point, bringing it to 5%, the highest since 2001, members of the governing council are aware of the risks associated with aggressive rate increases. The central bank’s summary of deliberations revealed that they pondered whether rate hikes were taking longer to impact the economy or if rates had not risen sufficiently to rein in inflation.

Inflation Concerns Linger for Bank of Canada

The Bank of Canada’s inflation rate has eased since last summer, settling at 2.8% in June, within the target range of 1% to 3%. However, concerns persist about elevated price growth, particularly in core inflation measures that exclude volatile components. New projections indicate that the journey back to a 2% inflation target will take longer than initially anticipated, with inflation expected to hover around 3% over the next year before gradually declining to 2% by mid-2025.

Given the economic uncertainties, the Bank of Canada intends to make rate decisions based on incoming economic data, taking a cautious approach. Their next interest rate decision is scheduled for September 6.

Short-Term Outlook:  Weaker Amid Heightened Volatility

In conclusion, the USD to CAD exchange rate dipped after the Federal Reserve’s interest rate hike, while the Bank of Canada remains vigilant about potential further rate increases. The cautious approach taken by both central banks will undoubtedly impact currency movements in the short term, making it crucial for traders to closely monitor economic data and policy decisions in the coming months.

Technical Analysis

The USD to CAD, based on the 4-hour chart analysis, shows a neutral to slightly bearish sentiment. The current price of 1.3182 is just below the 50-4H moving average, indicating a possible consolidation phase. The 200-4H moving average at 1.3224 suggests a potential bearish outlook. The 14-4H RSI reading of 48.24 points to weaker momentum.

The main support area lies between 1.3118 to 1.3142, and the main resistance area is at 1.3214 to 1.3232. Traders should closely monitor price action and key support and resistance levels for potential trend shifts.