USD/CAD Price Forecast: Holds above 1.4300 ahead of Fed Powell’s testimony
- USD/CAD stays above 1.4300, with investors awaiting the Fed’s Chair Powell’s testimony.
- The Fed left its key interest rates steady in January.
- The Canadian economy is expected to face the severe burden of US Trump’s order to impose 25% tariffs on steel and aluminum.
The USD/CAD pair trades inside Monday’s trading range around 1.4330 in Tuesday’s European session. The Loonie pair consolidates as investors await Federal Reserve (Fed) Chair Jerome Powell’s testimony before Congress at 15:00 GMT.
Investors will pay close attention to Fed Powell’s commentary to know for how long the Fed will keep interest rates unchanged in the range of 4.25%-4.50%. Strategists at Macquarie said, "Our updated view is for no change in the fed funds rate during 2025 with it likely to remain in the 4.25 to 4.5% range. Previously we had suggested there would be just one further 25 bps cut in either March or May."
Market participants believe that orders of 25% tariff imposition on imports of steel and aluminum by United States (US) President Donald Trump will be inflationary for the economy. Such a scenario will force Fed officials to maintain a status quo for longer.
Meanwhile, the outlook of the Canadian Dollar (CAD) remains bearish as Canada is expected to be the biggest casualty of Trump’s tariffs. Investors should note that Canada is the largest exporter of aluminum to the US.
On the economic front, investors will focus on the US Consumer Price Index (CPI) data for January, which will be released on Wednesday.
USD/CAD trades in a tight range of 1.4270-1.4380 from a week. The 50-period Exponential Moving Average (EMA) near 1.4365 continues to be a major barrier for the US Dollar bulls.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, which indicates a sideways trend.
A fresh upside move toward the round-level resistance of 1.4500 and the January 30 high of 1.4600 would appear after the pair breaks above the February 10 high of 1.4380.
In an alternate scenario, a downside move below the February 5 low of 1.4270 would drag the pair towards the December 10 high of 1.4195, followed by the December 11 low of 1.4120.
USD/CAD four-hour chart
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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