Loonie Eyes Further Gains to End Week on a High

USD/CAD PRICE, CHARTS AND ANALYSIS:

MOST READ: EUR/USD Price Forecast: EUR/USD Eyeing Bounce at Key Confluence Area

The Loonie has held firm against the rampant greenback this week as strength in the Dollar Index (DXY) was negated by Canadian inflation data and rate hike concerns. The 1.3500 level is now back into focus as markets have approached the European open with a wee bit of caution following yesterday’s risk-on tone.

DEBT CEILING, THE US DOLLAR AND CANADIAN INFLATION DATA

Yesterday we saw further developments on the US debt ceiling improve the overall market sentiment. The Dollar Index (DXY) received support from hawkish comments by Federal Reserve policymakers which saw the rate hike expectations for June rise briefly to around the 40% mark. The increased optimism around the US debt ceiling may see some dollar weakness as evidenced by the currency strength chart below and the price action following the European open. The safe haven appeal of the US dollar may start to wane as investors take a more risk-on approach.

Currency Strength Chart: Strongest – NZD, Weakest – USD.

Source: FinancialJuice

The DXY has been on an impressive run this week as it eyes its best 2-week performance since September. However, the strength in the US dollar was largely negated against the loonie as Canadian inflation ticked higher in April, its first rise in 10 months. This added pressure the Bank of Canada (BoC) with market participants beginning to reprice the odds of a surprise return to the hiking cycle by the Central Bank. This wouldn’t be a huge surprise as we have already seen the Reserve Bank of Australia (RBA) pause rate hikes only to return to the hiking cycle once more.

BANK OF CANADA

Bank of Canada (BoC) Governor Tiff Macklem has left the door open for a return to the hiking cycle should price pressures and inflation risk remain elevated. However, in comments post the inflation release Governor Macklem said he viewed the April rise in inflation as an anomaly, predicting that prices will continue their downward trajectory. Ahead of the Governors comments money markets had rate hike odds at 80% for a July hike which soon fell toward the 60% mark. Ina further nod to Macklems position regarding rate hikes the Central Bank warned that the ability of households in paying off their debts and stress in the housing market remain a concern. Are we seeing early signs that the rate hike cycle is finally taking hold?

The Calendar doesn’t look all that bad today, but the only data release comes in the form of Canadian retail sales data. On the US front we have Federal Reserve policymakers Williams and Bowman before we hear comments from Fed Chair Jerome Powell.

For all market-moving economic releases and events, see the DailyFX Calendar

TECHNICAL OUTLOOK AND FINAL THOUGHTS

From a technical perspective, USD/CAD is displaying mixed price action on the larger timeframes. On the daily chart below, price has been trading in a 160-pip range this week between the 1.3400 and 1.3660 handles. USDCAD has a habit of trading in tight ranges which precede a breakout (Shown by the orange circle on the chart), which could mean we are setting for our next major move on the pair. The pair is also caught between the 200 and 100-day Mas, with the 50-day MA resting just 50-pips above the current price.

Personally, I do hold a downside bias as the resistance around the 1.3500 mark and above is very strong, however we have seen very mixed and rangebound price action this week with a range breakout potentially providing the best opportunity. Whether such a breakout occurs today remains to be seen. Moves on the USD are likely to be key today as any news around the debt ceiling and comments by Federal Reserve policymakers are digested before the weekend.

Key Intraday Levels to Keep an Eye On

Support Levels:

• 1.3472 (200-day MA)
• 1.3440
• 1.3400

Resistance Levels:

• 1.3500 (100-day MA)
• 1.3538 (50-day MA)
• 1.3600

USD/CAD Daily Chart, May 19, 2023

Source: TradingView, Prepared by Zain Vawda

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda