Lower as Traders Brace for Fed Rate Decision

Overview

On Monday, the USD to CAD exchange rate experienced a decline as traders braced themselves for the U.S. Federal Reserve’s upcoming interest rate decisions and monetary policy statements, scheduled for release on Wednesday. The market’s focus is on whether the Fed will raise its benchmark interest rate by 25 basis points, but uncertainty prevails regarding potential future rate hikes.

Canadian Retail Sales Underperform

In contrast, Canadian retail sales have recently underperformed expectations, indicating a possible slowdown in economic growth that could influence the Bank of Canada’s interest rate decisions. May’s retail sales showed a modest 0.2% increase from April, falling short of the 0.5% forecast by analysts in a Reuters survey. The rise was mainly driven by higher sales at motor vehicle and parts dealers, as well as food and beverage retailers, according to Statistics Canada. Overall, five out of nine subsectors saw an increase in sales, accounting for 94.5% of retail trade, with retail sales in volume terms experiencing a slight 0.1% uptick.

Canada’s Annual Inflation Rate Dropped

This data aligns with the Bank of Canada’s projections of an economic slowdown and could discourage any further interest rate hikes this year. The central bank had already raised its policy rate to 5.0%, a 22-year high, and suggested the possibility of further hikes if inflation remains above its 2% target. However, Canada’s annual inflation rate dropped unexpectedly to 2.8% in June, largely due to lower energy prices, though food and shelter costs continued to rise. The Bank of Canada anticipates inflation to hover around 3% over the next year, gradually reaching its 2% target by mid-2025.

Short-Term Direction Fed Dependent, Long-Term Direction Impacted by Fed, BOC Combination

The direction of the USD to CAD exchange rate hinges on investors’ perception of which currency will emerge stronger. If the Federal Reserve pauses while the Bank of Canada continues its rate increases, the Canadian Dollar may gain the advantage. Conversely, if both central banks pause, the US Dollar could benefit from higher yields. On the other hand, if the Fed signals another rate hike in September, but recent economic data encourages the Bank of Canada to pause, the US Dollar may once again become the most attractive currency.

USD to CAD Ready to React to Shifting Dynamics

As the market awaits the Federal Reserve’s decision and its impact on the USD to CAD exchange rate, traders will be closely monitoring any signals from both central banks that could shape their short-term strategies. With the potential for contrasting outcomes, traders must remain vigilant and adaptable to swiftly capitalize on the shifting currency dynamics.

Technical Analysis

The Canadian Dollar is exhibiting neutral to slightly bearish sentiment as the 4-hour price of 1.3184 remains marginally lower than the previous close. The 50-4H moving average at 1.3179 is potential support with the 200-4H moving average at 1.3240 acting like resistance.  The 14-4H RSI reading of 48.83 indicates weaker momentum.

After rejecting the resistance zone at 1.3214 to 1.3232, sellers are now testing the 50-4H moving average. We could see a technical bounce on the first test of this level, but if it fails then look for the selling pressure to possibly extend into the support zone at 1.3142 to 1.3118.