Title: Canadian Dollar Forecast: USD/CAD Reversal Builds Ahead of Fed and BoC
By: Matt Weller, FOREX.com
Rewritten and Expanded Version
As global markets look toward an important week dominated by central bank decisions, the USD/CAD currency pair is attracting renewed interest from traders. Market participants are closely watching the policy outlooks of the U.S. Federal Reserve (Fed) and the Bank of Canada (BoC), which are both scheduled to announce new interest rate decisions in the coming days. The interplay of diverging economic fundamentals, interest rate policy expectations, and global macroeconomic influences is shaping the trajectory of the Canadian dollar.
This article offers a comprehensive technical and fundamental analysis of the USD/CAD pair, based on the original work by Matt Weller for FOREX.com and supplemented with additional insights from recent market developments.
Key Themes:
– USD/CAD reverses from recent highs, indicating potential bearish momentum
– Mixed data from Canada and the U.S. support speculation of diverging policy paths
– Oil prices and risk sentiment also heavily influencing CAD performance
– U.S. Fed and Bank of Canada rate decisions to drive short-term direction
USD/CAD Technical Breakdown
After reaching fresh five-month highs above 1.3800 in early October, USD/CAD has shown signs of a significant reversal. The pair established a short-term top around 1.3880, as bearish momentum began to build. A combination of short-term oversold signals and stronger performance by the CAD has contributed to a breakdown of bullish structure.
Key technical highlights:
– A clear Head and Shoulders reversal pattern is emerging on the daily chart, often indicative of a trend reversal
– Support levels are located near the 50-day moving average at 1.3570 and further down at 1.3470
– Resistance remains at recent highs around 1.3880, followed closely by psychological resistance at 1.3900
The Head and Shoulders setup suggests further bearish potential for USD/CAD, particularly if buyers fail to reclaim the 1.3700 near-term resistance. With momentum indicators such as RSI and MACD leaning bearish, the technical outlook for USD/CAD leans to the downside heading into the next round of central bank decisions.
Fundamental Factors Driving Currency Movements
To understand the recent reversal in USD/CAD, investors must consider several interwoven economic fundamentals from both the United States and Canada.
1. Interest Rate Expectations
Much of the recent price action has been driven by forecasts around the Fed’s and BoC’s respective interest rate policies.
Federal Reserve Outlook:
– The Federal Open Market Committee (FOMC) has maintained its high policy rate of 5.25–5.50 percent since July 2023
– Most economic surveys show market participants expect no rate hike at the upcoming November meeting
– However, inflation remains above the Fed’s 2 percent target, and forward guidance implies a “higher-for-longer” interest rate stance
– Markets currently price roughly a 25 percent probability of one more 25bps hike before year-end as of late October
Bank of Canada Forward Guidance:
– The BoC held its key interest rate at 5.00 percent in its most recent meeting, citing persistent inflation and an evolving growth outlook
– Interestingly, Canadian inflation numbers eased in September, with the headline CPI rising 3.8 percent from a year earlier, down from 4.1 percent in August
– The core CPI measures also began to cool, making it likely that the BoC will also maintain a hold stance at its next meeting
The divergence in economic data between Canada and the U.S. is key. Canada is experiencing slower growth and moderating inflation, and the BoC has signaled caution about over-tightening. In contrast, the U.S. economy continues to show robust GDP growth, labor market resilience, and strong consumer spending. This difference is already being reflected in interest rate
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