USD/CAD Price Forecast: Looks to Fed for fresh impetus; not out of the woods yet

The USD/CAD pair meets with a fresh supply on Wednesday and erodes a part of the previous day's strong move higher to the 1.3700 neighborhood, or a one-week high. The downtick, however, seems limited as traders now seem reluctant and opt to wait for the outcome of a two-day FOMC meeting, due later today.

The US central bank is widely expected to keep its benchmark interest rate unchanged amid concern that US President Donald Trump's tariffs could push up consumer prices. However, the accompanying policy statement, which includes the updated “dots plot”, and Fed Chair Jerome Powell's comments during the post-meeting press conference could provide some cues about the future rate-cut path. This, in turn, will play a key role in influencing the near-term US Dollar (USD) price dynamics and provide some meaningful impetus to the USD/CAD pair.

Heading into the key central bank event risk, the disappointing US macro data released on Tuesday pointed to a softening economy and reaffirmed bets that the Fed will lower borrowing costs in September. The US Census Bureau reported that Retail Sales declined by 0.9% in May compared to a contraction of 0.7% expected and a 0.1% dip in April. Moreover, US Industrial Production fell short of estimates and contracted 0.2% in May following a revised 0.1% rise a month earlier. This caps the overnight USD rally to the weekly peak and weighs on the USD/CAD pair.

The Canadian Dollar (CAD), on the other hand, draws some support from hopes that the US and Canada could have a trade deal soon. In act,  Canadian Prime Minister Mark Carney said on Monday he and Trump agreed to pursue negotiations toward a new economic and security deal within 30 days. Moreover, Trump said that although the two sides still have differences over policy, a trade deal was achievable in the coming weeks. This further seems to exert pressure on the USD/CAD pair, though weaker Crude Oil prices could cap the commodity-linked Loonie.

Furthermore, a further escalation of geopolitical tensions in the Middle East should offer some support to the safe-haven buck and limit losses for the currency pair. Aerial exchanges between Israel and Iran continued for the sixth straight day. Adding to this, Trump ramped up his rhetoric and demanded Iran’s unconditional surrender, fueling speculations over possible US involvement in the conflict. This, in turn, warrants caution before placing bearish bets around the USD/CAD pair and positioning for the resumption of over a one-month-old downtrend.

USD/CAD 4-hour chart

Technical Outlook

From a technical perspective, the overnight move higher could be attributed to some short-covering on the back of a slightly oversold Relative Strength Index (RSI) on the daily chart. Moreover, the recent fall witnessed over the past month or so has been along a descending channel, which points to a well-established short-term downtrend. This, in turn, suggests that the path of least resistance for the USD/CAD pair is to the downside.

Hence, any further recovery beyond the 1.3700 mark could be seen as a selling opportunity and remain capped near the top end of the trend channel, currently pegged near the 1.3735-1.3740 area. A sustained strength beyond, however, might suggest that the USD/CAD pair has formed a near-term bottom and pave the way for additional gains.

On the flip side, the 1.3645 area could offer immediate support, below which the USD/CAD pair could slide back to the 1.3600 mark en route to the year-to-date low, around the 1.3540-1.3535 region. This is closely followed by the trend-channel support, around the 1.3520 area, and the 1.3500 psychological mark. A convincing break below the latter will be seen as a fresh trigger for bearish traders.