USD/CAD holds gains ahead of the Fed, with downside attempts limited at 1.3650
- Canadian Dollar trims some losses as the USD pulls back ahead of the Fed.
- The Greenback rallied on Tuesday, with investors wary of the US involvement in the Israel-Iran war.
- The market is now looking at the Fed for further clues about a September rate cut.
The USD/CAD is trimming some gains on Wednesday, with investors reducing USD long positions ahead of the Federal Reserve’s monetary policy meeting, due later today. The pair retreated from highs near 1.3700 but still holds most of Tuesday’s gains.
The Dollar rallied about 0.8% on Tuesday, fuelled by a strong risk-averse sentiment after US President Trump demanded Iran’s unconditional surrender, threatened to increase its involvement in the war, and flagged the option of killing Iran’s supreme leader, Ali Khamenei.
Middle East tensions, on the other hand, are also pushing Crude prices higher. The US benchmark WTI Oil has been rallying sharply over the last two weeks to reach its highest prices since late January. With Canada being one of the world’s main Oil exporters, higher crude prices tend to support the CAD.
The Fed will define the US Dollar’s near-term direction
Investors’ focus today is shifting towards the Federal Reserve. The bank is widely expected to leave interest rates unchanged, but Chairman Powell’s comments and the economic and interest rate projections might alter the market’s monetary policy expectations.
Powell has been reluctant to commit to further monetary easing, citing concerns about inflationary pressures stemming from higher tariffs. The main point today will be assessing the impact of the weak macroeconomic data recently released on the bank’s forward guidance.
Any dovish hint in the Fed’s rhetoric might heighten hopes of a rate cut, probably in September, which would increase negative pressure on the US Dollar.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
