It extends the range of play before the key Fed decision

• USD/CAD is lower in a familiar trading range held over the past week or so.
• Bets on a 50bps Fed rate cut keep USD bulls on the defensive and limit gains.
• The downside remains limited amid favorable BoC expectations ahead of the Fed.

The USD/CAD pair is attracting some sellers following the previous day’s failure to find support above the 1.3600 level, although it lacks tracking and remains limited in a week-old range until the start of the European session on Wednesday. Traders are choosing to move to the sidelines and await the outcome of the pivotal two-day meeting of the Federal Open Market Committee (FOMC) before positioning for a firm near-term direction. Meanwhile, expectations for more aggressive policy easing by the Federal Reserve (Fed) are capping the US dollar’s (USD) overnight recovery from July 2023 lows and acting as a headwind for the currency pair.

According to CME Group’s FedWatch tool, markets are currently pricing in a more than 6 percent chance that the U.S. central bank will cut borrowing costs by 50 basis points later today. Bets were raised by the release of the US Consumer Price Index (CPI) and Producer Price Index (PPI), which indicated that inflation is easing. That overshadows upbeat US retail sales data on Tuesday, which eased concerns about a broader economic slowdown and prompted a short-covering move in the USD. In fact, the U.S. Census Bureau reported that retail sales rose 0.1 percent in August, versus an expected 0.2 percent decline, while sales excluding autos missed estimates and rose by 0.1%.

The yield on the benchmark 10-year US government bond rebounded from a 16-month low after the data, although the market’s immediate reaction proved short-lived amid dovish Fed expectations. The downside for the USD/CAD pair, however, appears limited as hopes for a further 50 bps interest rate cut by the Bank of Canada (BoC) next month supported signs of cooling inflation. In fact, Canada’s CPI posted its slowest growth rate since February 2021, and core measures also fell to their lowest level in 40 months. This, along with a modest decline in crude oil prices, is undermining the commodity-linked Loonie and providing support to the currency pair.

Technical perspectives

From a technical perspective, the recent price action within the range around the all-important 200-day simple moving average (SMA) constitutes the formation of a rectangle and marks a consolidation phase. Additionally, the neutral oscillators on the daily chart make it prudent to wait for a sustained move in either direction before positioning for a firm near-term trajectory.

Meanwhile, the move beyond the 1.3600 threshold is more likely to face some resistance near the monthly top around the 1.3620-1.3625 region reached last week. Some further buying will set the stage for an extension of the recent recovery from the multi-month low reached in August and allow the USD/CAD pair to recover the round figure of 1.3700 with an intermediate obstacle near the 1.3665-1.3670 area.

On the other hand, the 1.3565 area, or the lower limit of the trading range, could continue to act as an immediate support. A convincing breakout could pull USD/CAD to the psychological 1.3500 threshold, below which the decline could extend to the 1.3440 area or multi-month low. Spot prices could eventually drop to the 1.3400 mark en route to the February swing around the 1.3365 region.

USD/CAD 4 hour chart