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USD/CAD Price Forecast: Consolidates around 1.3950 ahead of Fed speaks

  • USD/CAD wobbles around 1.3950 as investors await speeches from a number of Fed officials.
  • The US official employment data was not released last week due to the government shutdown.
  • Investors await Canada’s employment data for fresh cues on the BoC’s monetary policy outlook.

The USD/CAD pair trades in a tight range around 1.3950 during the early European trading session on Tuesday. The Loonie pair consolidates as investors await speeches from a slew of Federal Reserve (Fed) officials scheduled in the North American.

Financial market participants would like to get fresh cues on the current status of the United States (US) labour market amid an absence of key economic data releases in the wake of the partial government shutdown.

Investors would also like to know the pace at which the Fed will continue easing interest rates. According to the CME FedWatch tool, traders see an 81.5% chance that the Fed will reduce borrowing rates in each of its two remaining policy meetings this year.

In Canada, investors await the employment data for September, which will be released on Friday. The impact of the labour market data will be significant on the Bank of Canada’s (BoC) monetary policy outlook.

USD/CAD stays above the 20-day Exponential Moving Average (EMA), which trades around 1.3890, suggesting that the near-term trend is bullish.

The 14-day Relative Strength Index (RSI) oscillates above 60, indicating a strong bullish momentum.

Going forward, a further upside move by the pair above the psychological level of 1.4000 would open the door towards the April 9 low of 1.4075, followed by the April 8 low of 1.4144.

On the flip side, the asset could slide towards the round level of 1.3600 and the June 16 low of 1.3540 if it breaks below the August 7 low of 1.3722.

USD/CAD daily chart

US Dollar FAQs

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

Author

Sagar Dua

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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