Today’s dual central bank announcements from the Federal Reserve and Bank of Canada are accompanied by significant anticipation of interest rate reductions, although the sentiment and direction provided by policymakers will probably influence market trends. As both central banks appear to prioritize growth risks over inflation, the focus shifts to the potential for either to deliver a surprise that could alter pricing along the curve. In the case of USD/CAD, recent trade optimism has played a significant role; however, the technical indicators indicate a bearish sentiment as we approach these events. The price action near the 200-day moving average is expected to be a critical factor in determining the subsequent movement. The Federal Reserve is anticipated to reduce rates by 25 basis points today, bringing the funds rate down to a range of 3.75–4%. Swaps indicate that the move is virtually assured, with markets also reflecting approximately a 95% probability of an additional cut in December. As there are no new forecasts expected, focus will shift to the language used in the policy statement, the distribution of votes, and Chair Powell’s upcoming press conference. Considering the constraints of the available data during the government lockdown, significant alterations to the statement are improbable. The Fed might maintain its perspective that job gains have “slowed” and inflation is “somewhat elevated,” although the softer September CPI data could lead to a somewhat more dovish stance. There is a possibility that the Fed may indicate a conclusion to quantitative tightening, although December appears to be the more probable timeframe. Any such announcement would likely exert a modest downward pressure on the dollar.
Powell is anticipated to adopt a dovish stance, emphasizing that there have been minimal changes since the easing cycle recommenced in September. A dissent from Stephen Miran advocating for a 50bp cut appears highly likely, whereas wider backing for a more substantial adjustment would convey a significant dovish message. The crucial insight for markets will be if Powell emphasizes that the Fed’s stance has increasingly leaned towards fostering growth as the momentum in the labor market diminishes. Prior to the Fed’s decision, the Bank of Canada is anticipated to reduce rates by 25 basis points, bringing its policy rate down to 2.25%. This move aims to support an economy that has been significantly affected by trade uncertainty and subdued private demand. Swaps indicate an 86% probability of a shift at this meeting and approximately a 20% likelihood of an additional cut in December. In light of the accelerating inflation and core measures consistently exceeding 3%, it seems the bank has redirected its attention to mitigating downside risks instead of responding to the data. Last week, Governor Tiff Macklem indicated that the Bank of Canada would be “putting more emphasis on potential risks” in its policy-setting process, highlighting the “lot of uncertainty” present and stating that officials “will have to be humble about our forecast.” This indicates that the policy may prioritize growth support over addressing inflation, similar to the approach taken by several other G10 central banks in recent times. Prime Minister Carney’s forthcoming budget is anticipated to increase expenditure and expand the deficit; however, it is improbable that it will counterbalance the fragility observed in the private sector. As trade tensions rise and business confidence diminishes, it appears that policymakers are poised to focus on risk management rather than prioritizing inflation control at this time.
Correlation analysis suggests that optimism regarding a sustainable US-Canada trade agreement prior to this week’s Trump–Xi meeting has been the primary influence on USD/CAD lately. This trend mirrors patterns seen in other cyclical currencies like the Australian and New Zealand dollars, making today’s policy decisions particularly significant. Both the Fed and BoC have the potential to influence the market, especially if either takes unexpected actions or seeks to guide market expectations further along the curve. However, although a spike in volatility is probable, the long-term impact on USD/CAD may be constrained. From a technical perspective, the short-term directional bias for USD/CAD is currently trending downward. Despite the longer-term uptrend being firmly established, the pair is currently experiencing a minor downtrend, steadily declining over the past few weeks. In anticipation of the FOMC and BoC decisions, the recent decline past minor support at 1.3980 resulted in a breach and a close below the 200-day moving average. A quick review of the charts highlights the significance of this level throughout the year, as it has both capped and supported the price for extended durations once breached. Currently positioned above the pair with a negative slope, this situation may encourage bearish traders to pursue additional downside opportunities, creating setups where stop-loss orders can be strategically placed above to mitigate the risk of a sudden reversal. For individuals evaluating bearish setups on the break, it is advisable to observe a retest and subsequent rejection at the 200-day moving average prior to entering the trade. A sustained move below 1.3940 would further strengthen the rationale for this position. 1.3900 emerges as a preliminary target, considering its previous role as both support and resistance earlier this year.
The presence of the 50-day moving average positioned just beneath indicates that the convergence of these levels is expected to present a significant challenge for bearish movements, assuming the price reaches that point. 1.3830 represents a minor level located beneath, with the July uptrend currently positioned in proximity to this area. If the breach of the 200-day moving average turns out to be a bear trap, leading to a subsequent reversal, the preferred bearish configuration may be reversed, enabling the establishment of long positions above, with a stop placed below for risk management. Should a reversal occur, the ideal scenario would involve a back-test followed by a bounce from the 200-day moving average prior to executing the trade. 1.3980 stands out as the initial target, followed by options at 1.4050 and 1.4080 thereafter. The momentum picture has shifted significantly over the past two weeks, as RSI (14) is now trending lower below 50, suggesting a gradual accumulation of downside pressure. The MACD has executed a bearish crossover with the signal line while still residing in positive territory, signaling a cautionary note to bullish investors that the directional strength is undergoing a shift.