USD to CAD Prices Forecast: Oil, Inflation Stir the Loonie Ahead of Fed

Highlights

• USD to CAD steadies ahead of pivotal Federal Reserve announcements at 18:00 GMT.
• Declining oil prices exert added pressure on the already sensitive Canadian Dollar.
• Markets anticipate the Federal Reserve will hold rates at 5.25% to 5.50%.
• Bank of Canada’s Deputy Governor signals mismatch between inflation trend and 2% target.

USD to CAD Dynamics Ahead of Federal Reserve Decision

The USD to CAD remained steady on Wednesday, recovering from its sharp decline the previous day. As traders appear to be repositioning ahead of the Federal Reserve’s announcement at 18:00 GMT, combined with Fed Chair Powell’s subsequent press briefing, the Canadian Dollar is also under pressure due to the decline in oil prices.

Anticipations from the Federal Reserve

The dollar has retained its robust position, showing only minor fluctuations against currencies like the yen. With the market largely expecting the Fed to maintain the rates between 5.25% and 5.50%, attention is largely centered on its future strategies. According to the CME FedWatch tool, there’s a split anticipation with a 30% probability of a rate hike in November and a 40% likelihood in December. However, projections suggest the FOMC might not implement its anticipated additional 25 basis points hike by the end of the year.

Canadian Dollar Rises on Inflation Data

Boosted by hotter-than-predicted inflation figures, the Canadian dollar saw a surge, reaching its strongest position since August 10th, before retracting slightly. Notably, August’s annual inflation rate for Canada soared to 4.0%, primarily driven by escalating gasoline prices. The unexpected inflation data increased the probability of a final rate hike in the Bank of Canada’s forthcoming October session.

Speculators and the Bank of Canada’s Stance

Despite the recent boost, speculators have heightened their pessimistic outlook on the Canadian dollar, reaching levels last observed in May, as per the U.S. Commodity Futures Trading Commission data. The likelihood of the Canadian central bank introducing a rate hike in October has almost doubled following the inflation report. Yet, the Bank of Canada’s Deputy Governor, Sharon Kozicki, opined that the erratic inflation trajectory does not necessarily align with the 2% inflation target.

Impact on Oil and Bonds

With oil prices, a significant Canadian export, witnessing a minor decline of 0.3% to stand at $91.20 a barrel, Canadian government bond yields have surged. Notably, the 10-year yield touched a high not seen since October 2008 before marginally settling down.

Short-term Forecast

Considering the upcoming Federal Reserve’s announcement and the recent inflation data in Canada, traders should remain vigilant. The market’s sentiment leans slightly bullish for the Canadian dollar in the short run, primarily due to potential policy actions from the Bank of Canada.

Technical Analysis

The current 4-hour price (1.3431) is slightly below its previous 4-hour price (1.3446). It’s situated near the 200-4H and 50-4H moving averages at 1.3528 and 1.3531 respectively, indicating a consolidation phase. The 14-4H RSI stands at 35.19, suggesting a weakened momentum without being in the oversold territory yet.

While there’s no minor support or resistance noted, the pair trades above the main support range of 1.3412 to 1.3372 but below the resistance zone of 1.3612 to 1.3654. These dynamics, combined with its proximity to moving averages and the RSI reading, hint at a slightly bearish market sentiment for USD to CAD in the short term.