Loonie Eyes Further Gains to End Week on a High

USD/CAD Rate, Charts and Analysis:

Most read: EUR/USD Price Forecast: EUR/USD is looking to bounce at the key confluence area

The Canadian Dollar held firm against the dollar rampant this week as the strength of the Dollar Index (DXY) was negated by Canadian inflation data and concerns about a rate hike. The 1.3500 level is now back in focus as markets approach the European open cautiously following yesterday’s risk tone.

Debt ceiling and inflation data in US and Canadian dollars

Yesterday we saw further developments in the US Debt Ceiling which improved overall market sentiment. Dollar Index (DXY) received a boost from hawkish comments by Fed policymakers that saw expectations of a brief June rate hike raised to around 40%. The growing optimism about the US debt ceiling could see some weakness in the dollar as evidenced by the currency strength chart below and the price action after the European opening. The safe-haven appeal of the US dollar may start to wane as investors take a more risky approach.

Currency Strength Chart: Strongest – New Zealand dollarthe weakest – USD.

Source: FinancialJuice

DXY has been on an impressive trajectory this week as it looks to its best two-week performance since September. However, the strength of the US dollar largely faded against the Canadian dollar as Canadian inflation rose in April, its first rise in 10 months. This added pressure on the Bank of Canada (BoC) as market participants began to reassess the odds of a sudden return of the picnicking cycle by the central bank. This wouldn’t be a huge surprise as we have already seen the RBA pause on rate hikes only to get back into the picnic cycle again.

Bank of Canada

Bank of Canada (BoC) Governor Tiff Macklem left the door open for a return to the picnic cycle should price pressures and inflation risks continue to rise. However, in comments following the inflation statement, Governor McCallum said he viewed the spike in inflation in April as an anomaly, and expected prices to continue their downward trajectory. Prior to the Conservatives’ comments, money markets had odds of an interest rate hike at 80% for a rate hike in July which quickly fell back to around 60%. In another sign of Macklems stance on rate hikes, the central bank warned that the ability of households to repay their debts and pressure in the housing market remained a concern. Are we seeing early signs that the rate hike cycle is finally starting to solidify?

The calendar doesn’t look that bad today, but the only data release comes in the form of Canadian retail sales. On the US front, we have Fed policymakers Williams and Bowman before we hear comments from Federal Reserve Chairman Jerome Powell.

For all the economic data and events that move the market, see DailyFX calendar

Technical outlook and final thoughts

From a technical perspective, the USD/CAD pair displays mixed price action on the larger timeframes. On the daily chart below, the price has been trading in a 160-point range this week between the 1.3400 and 1.3660 handles. USDCAD has a habit of trading in narrow ranges preceding the breakout (shown by the orange circle on the chart), which could mean that we are preparing for our next major move in the pair. The pair is also stuck between the 200 and the 100 day diamond, with the 50 day moving average just resting 50 pips above the current price.

Personally, I’m on the downside as the resistance around the 1.3500 mark and above is very strong, however we’ve seen very mixed and range bound price action this week with the range break potentially providing the best opportunity. It remains to be seen if this breach will happen today. USD moves are likely to be key today as any debt ceiling news and comments from Fed policy makers are digested ahead of the weekend.

Key intraday levels to watch

Support levels:

• 1.3472 (200-day moving average)
• 1.3440
• 1.3400

resistance levels:

• 1.3500 (100-day moving average)
• 1.3538 (50-day moving average)
• 1.3600

US dollars / Canadian dollars Daily chart, May 19, 2023

Source: TradingView, prepared by Zain Fouda

— Written by Zain Fouda L DailyFX.com

Connect with Zain and follow her on Twitter: @employee