Interest Rates Unchanged! USDCAD Extends Downtrend

Summary:

Amid uncertainty over Fed policy and fears of a renewed U.S. government shutdown, USDCAD may face selling pressure with limited upside potential. The interest rate decisions by the Fed and the Bank of Canada (BoC) will be the key focus later on Wednesday.

SELL USDCAD

Close Time

CLOSED

1.37372

Entry Price

1.35300

1.39300

1.39434 +0.00237 +0.17%

129.2

Pips

Profit

1.35300

1.36080

Exit Price

1.37372

Entry Price

1.39300

Fundamentals

Uncertainty surrounding Fed policy and concerns about a potential U.S. government shutdown are likely to exert selling pressure on USDCAD, capping its upside. The rate decisions from the Fed and the BoC

will take center stage later Wednesday. Markets widely expect the BoC to keep its benchmark rate unchanged at 2.25% at its January meeting, as inflation remains within the target range.

TD Bank analysts note that current economic data is insufficient to prompt the central bank to shift its policy stance. The underlying economy remains weak and faces significant uncertainties, despite easing inflationary pressures. Analysts point out that the BoC would only be forced to act if economic growth falls significantly short of expectations or the labor market deteriorates markedly. While the market consensus is for no rate adjustment this week, the prospect of further rate hikes has not been completely ruled out. Some institutions anticipate the BoC may raise rates again later this year, with a total hike of up to 50 bps.

It is also believed that the central bank will signal its future policy direction through its statement at this meeting, but the overall tone will remain balanced, without a clear dovish or hawkish tilt. Against the backdrop of persistently rising living costs and food price inflation nearly double the overall inflation rate, Canadian Prime Minister Justin Trudeau announced that the federal government will provide more direct fiscal support to residents by increasing the existing GST rebate. The rebate will be renamed the Canada Food and Necessities Benefit, with a 25% increase starting in July this year for a five-year period, alongside a one-time additional payment equivalent to 50% of the annual benefit level.

The Fed is also expected to hold interest rates steady, though it faces distinct challenges, including U.S. President Donald Trump's attempts to undermine the central bank's independence and the uncertainty over who will succeed Jerome Powell as Fed Chair when his term ends in May. Trump stated last week that he will soon announce his nominee for the next Fed Chair. Speculation over the successor is likely to weigh on the U.S. dollar, as markets expect the new Fed chief to lean toward accelerating the pace of rate cuts.

The U.S. government is facing the risk of a partial shutdown, as Senate Democratic Leader Chuck Schumer vowed to oppose a funding bill that includes appropriations for the Department of Homeland Security. Congress must pass government funding by January 30, or a partial shutdown will occur, which could drag the USDCAD exchange rate lower.

On the other hand, Trump's renewed tariff threats may limit the Canadian dollar's upside. Trump threatened on Saturday to impose a 100% tariff on Canadian goods if Canada strikes a trade deal with China, sparking fears of a resurgence of trade tensions.

Technical Analysis

From a weekly perspective, USDCAD has broken below the Bollinger Middle Band once again, and the MACD line and signal line have formed a death cross near the zero axis, indicating the continuation of the bearish trend. If prices continue to trade below the Bollinger Middle Band, the pair is highly likely to drop to around the EMA200 at 1.364 and the previous low at 1.353. The RSI stands at 42, entering the bearish territory, with lower highs forming consecutively.

On the 15-minute timeframe, the Bollinger Bands have contracted and narrowed, MAs have flattened, and bullish momentum has weakened significantly. Prices faced strong resistance after rebounding to the EMA200, signaling the late stage of a corrective bounce. Immediate support levels are seen at the psychological level of 1.37 and the previous low around 1.367. The RSI is at 54, reflecting neutral market sentiment with investors on the sidelines.

Therefore, it is recommended to adopt a sell-on-rallies approach as the primary strategy.

Interest Rates Unchanged! USDCAD Extends Downtrend_1

Interest Rates Unchanged! USDCAD Extends Downtrend_2

Trade Recommendations

Trade Direction: Sell

Entry Price: 1.376

Target Price: 1.353

Stop Loss: 1.393

Support: 1.36/1.357/1.35

Resistance Levels: 1.4/1.441/1.42

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Interest Rates Unchanged! USDCAD Extends Downtrend

Risk Disclosure