USD/CAD Fails to Hold Monthly Range Ahead of FOMC Meeting


Talking Points:

USD/CAD Fails to Hold Monthly Range Ahead of FOMC Meeting Amid Strong Canada Employment.

GBP/USD Tumbles Amid Hung U.K. Parliament; Former-Resistance Zone in Focus.

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The Canadian dollar outperforms its major counterpart as the region’s employment report showed a 54.5K jump in job growth, but the USD/CAD may continue to operate within a narrow range as market attention turns to the Federal Open Market Committee’s (FOMC) interest rate decision on June 14.

With the FOMC widely anticipated to deliver a 25bp rate-hike next week, expectations for higher borrowing-costs may limit the downside risk for USD/CAD, and the broader outlook for the pair remains tilted to the upside especially as the Bank of Canada (BoC) remains in rush to lift its benchmark interest rate off of the record-low. However, the fresh projections coming out of the Fed may dampen the appeal of the greenback should officials continue to project a terminal fed funds rate close to 3.00%, and the committee may attempt to buy more time as ‘market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

USD/CAD Daily

USD/CAD Daily Chart

Chart – Created Using Trading View

  • Failure to preserve the monthly range may fuel the recent decline in USD/CAD especially as the pair remains capped by the Fibonacci overlap around 1.3560 (50% expansion) to 1.3570 (61.8% expansion), with a close below the 1.3440 (38.2% expansion) hurdle opening up the next downside region of interest coming in around 1.3300 (38.2% expansion) to 1.3360 (23.6% expansion).
  • Nevertheless, longer-term outlook for USD/CAD remains constructive as price & the Relative Strength Index (RSI) preserve the upward trends from 2016, with the momentum indicator flashing a bullish trigger as it threatens the bearish formation carried over from the previous month.

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The British Pound sheds the advance from earlier this month as the Conservative party loses its majority in Parliament, with Prime Minister Theresa May pledging to form a working government.

However, GBP/USD stands at risk of facing additional headwinds over the near-term amid the growing uncertainty surrounding the U.K. economy, and the Bank of England (BoE) may keep the door open to further embark on its easing-cycle as especially as ‘the Committee judges that consumption growth will be slower in the near term than previously anticipated.’

With ‘Brexit’ negotiations scheduled to start on June 19, Governor Mark Carney may continue to tame interest rate expectations at the June 15 meeting as especially as ‘wage growth has been notably weaker than expected,’ and more of the same from the BoE may drag on Sterling as officials are like to reiterate ‘monetary policy can respond in either direction to changes to the economic outlook.’

GBP/USD Daily

GBP/USD Daily Chart

Chart – Created Using Trading View

  • Downside targets are in focus for GBP/USD as it fails to preserve the upward trend from March and breaks below the 50-Day SMA (1.2805); the Relative Strength Index (RSI) shows a similar dynamic, with the momentum indicator highlighting the risk for a further a decline in the exchange rate as the oscillator extends the bearish formation carried over from the previous month.
  • It seems as though the former-resistance zone around 1.2630 (38.2% expansion) to 1.2680 (50% retracement) is offering support as the pound-dollar exchange rate snaps back from a fresh monthly low of 1.2626, but a break/close below the Fibonacci overlap should open up the next downside target around 1.2460 (61.8% expansion) to 1.2490 (38.2% retracement) as the relief rally in the British Pound appears to be coming to an end.

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IG Sentiment

  • Retail trader data shows 55.6% of traders are net-long USD/CAD with the ratio of traders long to short at 1.25 to 1. The number of traders net-long is 8.5% lower than yesterday and 15.3% lower from last week, while the number of traders net-short is 13.7% lower than yesterday and 15.5% lower from last week.
  • Retail trader data shows 46.3% of traders are net-long GBP/USD with the ratio of traders short to long at 1.16 to 1. The number of traders net-long is 35.6% higher than yesterday and 39.4% higher from last week, while the number of traders net-short is 11.9% higher than yesterday and 14.6% higher from last week.

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— Written by David Song, Currency Analyst

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