USD/CAD Price Forecast: Advances to near 1.3840 ahead of Fed Powell’s speech
- USD/CAD climbs to near 1.3840 as the Canadian Dollar underperforms.
- The BoC is expected to cut interest rates again in October.
- Investors await Fed Powell’s speech for fresh cues on the monetary policy outlook.
The USD/CAD pair jumps to near 1.3840 during the European trading session on Tuesday. The Loonie pair advances even as the US Dollar (USD) trades cautiously, suggesting weakness in the Canadian Dollar (CAD).
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat around 97.30.
The Canadian Dollar faces selling pressure amid firm expectations that the Bank of Canada (BoC) will cut interest rates again in the policy meeting October. The BoC reduced interest rates by 25 basis points (bps) to 2.5% in the last week’s monetary policy announcement amid weakness in the labor market.
Meanwhile, investors await the speech from Federal Reserve (Fed) Chair Jerome Powell, which is scheduled at 16:35 GMT. Investors will pay close attention to Fed Powell’s speech to get cues on the monetary policy outlook.
In the North American session, investors will also focus on the flash United States (US) S&P Global PMI data for September.
USD/CAD extends its week-long recovery move to near 1.3840 on Tuesday. However, the overall trend of the pair remains uncertain as the it stays below the 200-day Exponential Moving Average (EMA), which trades around 1.3865.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, indicating indecisiveness among investors.
Going forward, a recovery move by the pair above the August 22 high of 1.3925 would open the door towards the May 15 high of 1.4000, followed by the April 9 low of 1.4075.
On the flip side, the asset could slide towards the round level of 1.3600 and June 16 low of 1.3540 if it breaks below the August 7 low of 1.3722.
USD/CAD daily chart
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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.
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