USD/CAD Post-Fed Pullback At Risk As RSI Recovers From Oversold Zone

CANADIAN DOLLAR TALKING POINTS

USD/CAD tracks the range-bound price action from earlier this week as the Federal Reserve sticks to the sidelines at its last meeting for 2020, but the exchange rate may stage a near-term correction over the coming days as the Relative Strength Index (RSI) appears to be bouncing back from oversold territory to threaten the downward trend carried over from November.

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USD/CAD POST-FED PULLBACK AT RISK ASRSI RECOVERS FROM OVERSOLD ZONE

USD/CAD pulls back from the weekly high (1.2790) as the Federal Open Market Committee (FOMC) reiterates that the central bank remains “prepared to adjust the stance of monetary policy as appropriate,” and it seems as though the Fed will retain a wait-and-see approach over the coming months as “fewer participants see the balance of risks as weighted to the downside than in September.”

The comments suggest the FOMC will rely on its current tools to support the US economy as the central bank plans to “increase our holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month,” and it remains to be seen if the Fed will change its tone in 2021 as Chairman Jerome Powell insists that “if progress toward our goals were to slow, the guidance would convey our intention to increase policy accommodation through a lower expected path of the federal funds rate and a higher expected path of the balance sheet.”

In turn, key market trends look poised to persist as the US Dollar still reflects an inverse relationship with investor confidence, and swings in risk appetite may continue to sway USD/CAD as the Bank of Canada (BoC) acknowledges that “a broad-based decline in the US exchange rate has contributed to a further appreciation of the Canadian dollar.”

Image of IG Client Sentiment for USD/CAD rate

At the same time, the tilt in retail sentiment may carry into 2021 as trades have been net-long USD/CAD since mid-May, with the IG Client Sentiment report showing 70.61% of traders net-long the pair as the ratio of traders long to short stands at 2.40 to 1.

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