This week, the Federal Reserve took a slightly more hawkish stance than expected. They decided to keep interest rates unchanged at a range of 5.00-5.25%, but they increased the projected terminal rate in the Dot Plot by 50 basis points. The FOMC chose to pause during this meeting to gather more economic data before making a decision on a potential interest rate hike in July. They were cautious due to the weaker details in the latest NFP report, the ISM Services PMI report, and the CPI report, although the core inflation readings remained at high levels.
Fed Chair Powell mentioned that the July meeting is “live” but didn't want to commit in advance. When the Dot Plot was released, the market quickly bid up the US Dollar, but it returned to its original levels once Powell's press conference began. Overall, this indicates that the Federal Reserve is prepared to take further action to reduce inflation, but their decisions will depend on the economic data. Yesterday, the number of US Jobless Claims once again missed expectations by a significant margin, which could be another indication of a weakening labour market.
USDCAD Technical Analysis – Daily Timeframe
On the daily chart, we can see that the USDCAD has eventually reached the key 1.3225 support level. This is where we should find strong buyers defending the level with a defined risk below it and the 1.38 as target. This would be a play on the expectations that we will still see a range, and therefore keep buying at support and selling at resistance. The sellers, will try to push the price below the level and squeeze the buyers, eventually extending the selloff into the 1.30 handle at least. The overextension from the blue 8 moving average though, suggests that we may first see a pullback before another possible try of a break lower.
USDCAD Technical Analysis – 4 hour Timeframe
On the 4 hour chart, we can see that we have a divergence with the MACD right into the key 1.3225 support level. This is generally a sign of weakening momentum often followed by pullbacks or reversals. In this case, we may get a pullback into the downward trendline and the previous resistance level where the sellers should pile in for another push to the downside.
USDCAD Technical Analysis – 1 hour Timeframe
On the 1 hour chart, we can see that from a risk management perspective, the sellers should be better off leaning on the 1.33 resistance as there’s confluence with the psychological round number, the 61.8% Fibonacci retracement level, the trendline and the daily 8 moving average. With such a strong resistance the sellers would have a much better risk to reward setup. The buyers, on the other hand, may lean on this 1.3225 support to target the 1.33 level first and then a breakout of the trendline to extend the rally towards the 1.34 resistance.
Today, the market will pay attention to the University of Michigan consumer sentiment report. Last time, the market reacted strongly to this report because long-term inflation expectations showed a significant increase, going up from 3.0% to 3.2%. However, the number was later adjusted to 3.1%. So, if we observe another rise in long-term inflation expectations, it's likely that the US dollar will go up. On the other hand, if the data doesn't meet the forecasts, we may see the dollar decreasing in value.
