Canadian Dollar tests monthly lows against US Dollar ahead of Fed decision

USD/CAD extends gains for the sixth consecutive day to test monthly highs at 1.3935.
Markets are pricing a 92% chance of a Fed rate hike on Wednesday and an 80% probability of at least one more before the end of the year.
Fed-BoC monetary policy divergence is offsetting the positive impact of higher oil prices on the CAD.

Guillermo Alcala FXStreet

The Canadian Dollar (CAD) trades lower against a firm US Dollar (USD) on Wednesday, with the market positioned for a quarter rate hike by the Federal Reserve (Fed), the first one in three years, later in the day. The USD/CAD accumulates a 1% rally on a six-day wim¡ning streak that has brought the pair to test monthly highs at 1.3935 at the time of writing.

Strong US employment and hot inflation figures have triggered a hawkish repricing of the US central bank’s near-term monetary policy that has been boosting the Greenback across the board over the last few days. Futures markets are pricing a 92% chance of a quarter-point rate hike later on Wednesday and a nearly 80% chance of at least another one before the end of the year, up from 60% and less than 50% respectively one week before, according to figures by the CME's FedWatch Tool.

Dollar path hinges on Fed tone as markets eye second hike

Analysts at Societe Generale observe that the US Dollar's near-term direction depends on nuances from Fed Chair Kevin Warsh. If Warsh “does not sound hawkish (and) the market starts doubting there will be a second hike by the end of the year, assuming there is one today (...) the dollar will struggle to make further gains,” says the bank in a note.

Conversely, Societe Generale maintains that “if, however, it appears that we are likely to see a further hike after today, which is our expectation, the dollar has some additional upside from current levels.”

The Canadian Dollar, on the other hand, has failed to draw any significant support from high Oil prices, a traditional support for the Loonie, as Crude Oil is Canada's main export. Brent Crude consolidates gains around $104.00 per barrel, just below the four-month highs above 106.00 hit last week, after rallying more than 20% over the last two weeks, with the conflict in the Middle East sliding into a particularly uncertain phase, as regional powers enter the scene.

Beyond that, monetary policy divergence poses additional pressure on the CAD, as the Bank of Canada (BoC) is widely expected to leave interest rates on hold for the rest of the year, at least. The higher inflationary pressures have triggered some speculation about a rate hike in December, although the BoC seems unlikely to confirm those views unless the trade status with the US improves.

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).

Economic Indicator

FOMC Economic Projections

At four of its eight scheduled annual meetings, the Federal Reserve (Fed) releases a report detailing its projections for inflation, the unemployment rate and economic growth over the next two years and, more importantly, a breakdown of each Federal Open Market Committee (FOMC) member's individual interest rate forecasts.

AUD/USD hangs close to monthly lows, still defends 0.7100 ahead of Fed decision

AUD/USD retains its negative bias for the third straight day, defending 0.7100 while trading close to a monthly low in Wednesday's Asian session on Wednesday. The US Dollar stands firm near a two-week high as the anticipated Fed rate hike and oil-driven inflation fears continue to push US bond yields to a multi-year high. Furthermore, escalating Middle East tensions benefit the safe-haven buck and weigh on the risk-sensitive Aussie.

USD/JPY holds firm above 155.00, awaits Fed policy announcements

USD/JPY climbs to a fresh one-week high above 155.00 in the Asian session on Wednesday amid a bullish US Dollar. Oil-driven inflation fears, along with the anticipated Fed rate hike, continue to support surging US bond yields. Moreover, rising US-Iran tensions underpin the USD's reserve currency status. The pair, however, remains below the mid-155.00s as bulls seem hesitant ahead of the Fed decision later today and the BoJ meeting, starting on Thursday.

Gold traders seem noncommittal below $4,350; eyes Fed rate decision

Gold clings to modest intraday gains through the first half of the European session, albeit it lacks follow-through buying and remains below $4,350. The US Dollar eases from a two-week high amid some profit-taking, offering support to the commodity. Traders, however, seem hesitant to place aggressive directional bets and opt to wait on the sidelines heading into the key central bank event risk.

Cardano's bearish breakout warns of a 15% downside risk

Cardano (ADA) hovers around $0.1900 at press time on Wednesday after a 6% decline the previous day, breaking below a crucial support level. Declining on-chain activity across the Cardano ecosystem, with reduced transaction count and Real Economic Value (REV), suggests waning user demand.

Fed decision in focus

Starting with the most important, the Fed decision. Heading into the event, data showed a rather punchy US August jobs report, which, you will likely recall, triggered a hawkish Fed rate repricing in rates markets. However, the recent US August CPI print mattered more.

How Japan became the World's Banker and why that era may be ending

Japan's ultra-low interest rates helped finance trillions of dollars in global investments for more than a decade, making the Japanese Yen one of the world’s cheapest sources of funding. With the Bank of Japan expected to tighten policy again this week, that advantage may be entering a new phase. While most major economies raised interest rates, Japan remained the world's outlier.