"Downward Wave 5" Is Emerging After Breaking Key Support Levels

Forex

Central Bank

Summary:

As investors sold the USD under the guidance of the Fed doves, the USDCAD remained weak. As we said yesterday, the USDCAD cannot fall below the key support of 1.3480, otherwise the bullish trend is invalid.

SELL USDCAD

Close Time

CLOSED

1.34014

Entry Price

1.31960

1.36180

1.38213 +0.00066 +0.05%

205.4

Pips

Profit

1.31960

1.31955

Exit Price

1.34014

Entry Price

1.36180

Fundamentals

On Wednesday, the U.S. stock market soared, and the Dow Jones hit a new high. After the Federal Reserve decided to keep the interest rate unchanged at 5.25-5.50%, the yield of U.S. Treasury Securities and the USD plummeted. This decision, which was widely expected by the market, was masked by signs that the Fed indicated that it might cut interest rates in 2024. The Fed hinted that it may cut interest rates by 25 basis points three times next year, bringing the federal funds rate back to 4.50-4.75%.

At the press conference after the meeting, Federal Reserve Chairman Powell admitted that discussions on reducing policy restrictions were emerging at the meeting. Powell said, "The question of when to appropriately reduce the existing policy restrictions has begun to appear in people's field of vision, which is obviously a topic of discussion all over the world, and it is also a topic of discussion at our meeting today." He further pointed out that it is widely expected that this issue will become the key focus of the Fed in the future.

The new economic forecast offers a detailed prospect. The median forecast shows that the federal funds rate will drop from the current 5.4% to 4.6% in 2024, further to 3.6% in 2025, and finally to 2.9% in 2026. The long-term federal funds rate is stable at 2.50%. The central trend in 2024 is 4.4-4.9%, with a relatively narrow range and stable interest rate expectations.

The GDP growth forecast slowed down from 2.6% in 2023 to 1.4% in 2024 and then rebounded to 1.8% in 2025 and 1.9% in 2026. The unemployment rate is expected to rise from 3.8% in 2023 to 4.1% in 2024. In 2024, it will stabilize at this level until 2026.

Concerning inflation, it is estimated that the overall PCE inflation will decrease from 2.8% in 2023 to 2.4% in 2024, 2.1% in 2025 and 2.0% in 2026. Similarly, core PCE inflation is expected to slow down from 3.2% in 2023 to 2.4% in 2026. After 2024, it will reach 2.2% in 2025 and 2.0% in 2026.

After the data was released, the USDCAD fell sharply, extending the decline to below the threshold of 1.3500 during the early Asian session on Thursday. As of press time, the USDCAD traded at 1.3442, down 0.1% on that day.

The market is now focusing on the number of jobless claims and retail sales data to be released in the U.S. at the beginning of each week. On Friday, the U.S. Standard & Poor's global PMI data will be released soon, and Bank of Canada Governor Tiff Macklem will deliver a speech in New York. These events may give the USDCAD a clear direction.

"Downward Wave 5" Is Emerging After Breaking Key Support Levels_1

Technical Analysis

On Wednesday, the USDCAD resumed its downtrend from 1.3897 after falling below 1.3480 support. The intraday bias is to the downside, targeting the 1.3378 support level. A test of this level is expected to bring a rebound, but a break above the 1.3617 resistance level is still needed to indicate a short-term bottom. Otherwise, risks will continue to the downside in case of a recovery.

From a broader perspective, the rise from 1.3091 is seen as the fifth trend that started the entire rise from 1.2005 (2021 low). A further rebound is expected as long as the 1.3378 support level is held. However, a decisive break below 1.3378 would weaken this view and lead to a further decline to 1.3091.

Overall, the USDCAD fell below the key support level of 1.3480, and "Downward Wave 5" is emerging; as long as the rebound did not break Wave 4, "Downward Wave 5" is still intact. It is recommended to go short at the highs.

Trading Recommendations

Trading direction: Short

Entry price: 1.3480

Target price: 1.3196

Stop loss: 1.3618

Deadline: 2023-12-28 23:55:00

Support: 1.3416, 1.3373, 1.3320

Resistance: 1.3480, 1.3542, 1.3618

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