USDCAD Reverses Course as BOC Confirm Divergence With FED

USDCAD broke out of a two-month triangle pattern following last Friday’s NFP report and now resistance has turned into support. The pair was trading within a tight range in the first two days of this week, but yesterday we saw a tumble lower to 1.3680. However, the price found support at the previous descending resistance trendline, which has now flipped to act as a support level.

Yesterday the US dollar initially dived lower on the weaker inflation numbers, but then gained strength post-FOMC decision, recovering half of its losses following the CPI release, which sent the Fed funds futures pricing to an 80% probability of a rate cut in September. That pushed USD/CAD down by 70 pips below 1.37 where the decline stopped despite expectations fueled by the low CPI.

USD/CAD Chart H4 – Resistance Turns into Support

However, this decline found support at the descending trendline we mentioned above, which reinforced the bullish breakout from Friday, as we mentioned yesterday. Moving averages contributed further strength to this support zone, prompting a rebound after Fed Chair Jerome Powell maintained a surprisingly hawkish stance, contrary to his dovish reputation. Market participants anticipated hints of a September rate cut or more definitive guidance, but Powell emphasized the Fed’s data dependency instead. Coupled with the dot plot projecting only one rate cut by year-end, this development propelled USD/CAD back above the 1.37 level.

FED and BOC Diverging Policy

The Bank of Canada recently initiated a divergence from the Fed by cutting its benchmark interest rate by 25 basis points, from 5.00% to 4.75%, during its latest meeting last week. Governor Macklem also reiterated yesterday that while the Bank is moving in the direction of divergence from the Fed, the gap between their policies is not yet significant, which means that they can continue to cut rates even if the FED stays on hold.

Meanwhile, the Federal Reserve, as widely anticipated, kept its rates unchanged at 5.50% during yesterday’s meeting. The Dot Plot revealed that most members of the Committee now prefer either one rate reduction or no cuts at all for the remainder of the year, a shift from earlier expectations of 2-3 cuts.

USD/CAD Live Chart