USD/CAD forecast: Funds jumps right back into the mix ahead of the Fed

• USD/CAD rallies back to 1.34 handle, back into the rising channel.
• Federal Reserve is now the key driver, with Canadian CPI and Retail Sales in focus.
• Our Forecast Poll shows a short-term bullish bias that gets neutralized in the mid-term.

This was the week: Geopolitics, the Federal Reserve and the dollar all bounced back into vogue

USD/CAD was quite the ride on the week with a mixed outlook for the Fed along with a constant inflow of geopolitical headlines affecting the price of oil that continues to rock the apple cart from both ends. Then, the US data came along. Consumer Price Index (CPI) and Retail Sales gave mixed signals and only added to the trend-trader's frustration, either washed out of long Funds earlier in the week around the CPI event, or worse still, switching over to get short the Dollar. 

However, all in all, fundamentalists can be certain of one thing, having noted that the Bank of Canada (BoC) has dropped their hawkish bias while maintaining a focus on household spending, oil markets and global trade uncertainty - rallies in Loonie will likely remain capped and on Friday, the market got a taste of how susceptible Funds will be to the upside on positive U.S. economic data for the rest of this year. While the Fed is certainly leaning more dovish this year, market expectations of 100 basis points (bp) of easing could be a touch too aggressive given the robustness of U.S. wages, employment and the outlook for consumer demand. Meanwhile, the pair is likely to trade between a range of 1.3100/1.4000 for the year – Although the balance of trade risks implies that the pair will spend the majority of its time this year in a narrower 1.33-1.40 range.

Key CAD events:

It was a quieter week for the Canadain calendar, although there was an improvement in Housing Starts and Building Permits and an inline Housing Price Index. For the week ahead, Canadian Retail Sales and the Consumer Price Index will be in focus. 

• TD Securities is looking for Consumer Price Index inflation to firm to 2.2% year-over-year (YoY), with prices up 0.2% month-over-month (MoM).
• As for Retail Sales, the analysts at TD Securities forecast an unchanged print for April figure, owing to a drag from motor vehicles (ex-autos: +0.2%). 

Key U.S. events:

The disappointing US jobs numbers from the prior week kept US yields down. This week, the Consumer Price Index reading only strengthened the case for a Fed cut, in the market's opinion. However, there was something for both bears and bulls in the report and the Dollar climbed back, pressuring Funds higher again.

• The headline CPI data climbed by just 0.1%, with the annual pace easing back to 1.8% from 2%. Core inflation rose by just 0.1% as well as taking the annual rate down from 2.1% to 2.0% and slightly below expectations. However,  the key services components suggest underlying prices remain firm and we may see next week that Fed officials will regard some of the factors as just transitory.
• As for Retail Sales, these increased by 0.5% on a monthly basis in May, broadly in line with expectations but significant upward revisions gave the report a positive glow. April’s figure went from -0.2% MoM to now become +0.3%. The “control group” which strips out some of the volatile components, such as autos, gasoline stations and building materials was actually a touch above expectations, rising 0.5% MoM versus the 0.4% consensus, while April’s figure is now +0.4%MoM growth versus the 0% figure originally reported.

Looking ahead, the Federal Reserve is expected to use this Federal Open Market Committee meeting as a base to signal their readiness to ease policy. July has been priced already due to pending risks to the economy. However, the statement and the dot plot will be key, as usual. "We expect the median 2019 dot to remain unchanged (reflecting on-hold) and the median 2020 dot to decline," analysts at TD Securities argued. 

USD/CAD Technical Analysis

The price ripped through to the 1.34 handle, clearing 1.3350 like a knife through butter and broke the 21-D Exponential Moving Average (EMA). Stochastics indicated the continuation on the 12th June's daily candlestick. The price has stalled just short of the 61.8% Fibo but has crucially broken back into the rising long term channel est. Sep 2017. The 200-D EMA had been relatively supportive on the downside at 1.3270, meeting 17th April lows and will be the bears' target to break guarding 1.3070 as the 2019 lows.

USD/CAD Forecast Poll

The FXStreet forex poll of experts is a sentiment tool that highlights near- and medium-term price expectations from leading market experts and shows a bullish bias near term turning bearish over time.