USD/CAD drops below 1.30 as DXY fades FOMC-led spike

  • FOMC announces 25 bps rate hike in line with market expectations.
  • Median forecast of Fed policymakers is for a total of four rate hikes in 2018.
  • The DXY spikes above the 94 mark with the initial reaction but loses momentum.

The USD/CAD pair jumped to a weekly high of 1.3050 with the initial reaction to the FOMC announcements but failed to hold on to its gains as profit-taking forced the greenback to lose its strength. As of writing, the pair was trading at 1.2986, losing 0.22% on the day.

As expected, the FOMC decided to raise its Fed funds target rate by 25 basis points to 1.75%-2% range. The updated economic projections showed that the median forecast of Fed policymakers was for a total of four rate hikes in 2018. Speaking at the press conference, Chairman Powell reiterated that the economy was in a very good shape and they were going to continue to gradually hike rates in order to normalize the monetary policy.

Responding to a question from the press, Powell also stated that they discussed removing the term 'accommodative monetary policy' from the forward guidance. 

Despite all these hawkish remarks, however, the US Dollar Index failed to extend its gains above the 94 mark. Investors may be looking to book their profits ahead of tomorrow's ECB meeting to avoid getting caught on the wrong side of a major surprise.

Meanwhile, the barrel of West Texas Intermediate settled $66.64, adding 28 cents, or 0.42%, to give an additional support to the commodity-linked loonie.

Technical levels to consider

The pair could encounter the initial support at 1.2945 (20-DMA) ahead of 1.2865 (50-DMA) and 1.2815 (May 31 low). On the upside, resistances are located at 1.3000 (psychological level), 1.3050 (daily high) and 1.3100 (psychological level).

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