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It is not a very big week for data, which means the US debt ceiling talks could dominate the agenda, while earnings from retailers and consumer spending data will tell us a lot about the health of the US consumer. Given that we also have some important data from north of the US border, Canada, this will impact the USD/CAD forecast and will put the pair under the spotlight.

Dollar gives back some of last week’s sharp gains

Last week saw the USD dollar stage a broad-based rally, although it has given some of its gains back at the start of this week against most major currencies except the yen, owing to an improvement in risk sentiment. Traders are evidently not too concerned about the US debt ceiling situation, expecting a deal to be reached. Talks between the two sides will resume again on Tuesday after being pushed back last week. President Biden has said that the two sides are keen to reach a deal.

The dollar rose last week as the slightly weaker-than-expected US inflation data failed to cement expectations that US interest rates have peaked. A stronger US jobs report the week before and hawkish comments from the Fed President Jerome Powell had poured cold waters on speculation that the Fed could cut interest rates by as early as September. In fact, there’s now some speculation that the Fed could even raise rates further, although the chances of that look slim with a less than 20% odds attached to it by the market, according to the CME’s Fed Watch tool.

Expect hawkish rhetoric from FedSpeak

Looking at the macro calendar, the week is dominated by several Federal Reserve speakers throughout the week, culminating in a speech by the head of the Fed, Jay Powell, on Friday. Investors will be listening carefully for clues over whether the Fed will cut interest rates in the months ahead or keep a contractionary monetary policy in place for longer.

The Fed's Bostic has come out saying that cutting rates this year is not his baseline, echoing the sentiment from several other officials that had spoken in the previous weeks. In fact, Bostic went as far as to say he doesn't expect to cut rates well into 2024, and if anything, “we may have to go up on rates.”

His hawkish comments fell on deaf ears, though, as the market refused to buy USD in the first half of Monday’s session (except against the yen).

Markets expect sooner rate cuts than Fed

Unlike the indications we have got from Powell, Bostic and several other FOMC officials, the market expects rate cuts from as early as September. This means that the Fed could shift to easing just after 4 months at a peak cycle rate. In the previous rate-hiking cycles, the Fed had taken much longer to start easing policy. For example, when the hiking ended in Dec 2018, the Fed started cutting rates 7 months later in July 2019. After the June 2006 hike, it was 15 months before the first cut. Finally, it took 8 months following the May 2000 hike before policy was eased.

Given the Fed’s tendency to wait a while before pivoting, the market may be getting ahead of itself this time. Things could only go wrong from here for traders with these expectations, right?

Well, perhaps not. It could be different this time. Given that inflation has peaked, and it could reach the Fed’s 2% target very soon.

The 10^th consecutive drop in US CPI to a two-year low of 4.9% in April has raised hopes that it is only a matter of time before the Fed starts cutting rates, even if it doesn’t want to admit it. US inflation is likely to fall even more in the next two months, as the impact of last year’s big CPI prints come out of the year-over-year equation.

What’s more, there’s the potential for the impact of the past rate hikes to hurt the housing market, and the consumer.

USD/CAD forecast: Economic calendar highlights for the Loonie

Bringing the focus back to the near-term, here are this week’s key data releases to watch that could impact the USD/CAD forecast.

In addition to the above data, we have earnings from the likes of HD, BIDU, TGT, TJX, WMT, FL, BABA and DE. Earnings from these retailers and consumer spending data will tell us a lot about the health of the US consumer. Given that we also have some important data from Canada, namely, CPI and retail sales, this will keep USD/CAD traders busy.

USD/CAD forecast: Technical analysis

The USD/CAD continues to coil inside a narrowing range as highlighting by the converging trend lines, as price oscillates around its long-term 200-day average. It is not a trending market, making it ideal for range traders. However, soon it could provide us a clear signal about its direction bias, depending on which level it breaks first.

Given last Thursday’s big rally off key support around 1.3350, there’s no real reason for price to re-test that level again now. So, if it does, it will most likely break lower this time. Thus, a move below Thursday’s low at 1.3363 is the line in the sand for the bulls (= below is bearish).

While last week’s rally was impressive, the USD/CAD forecast has not changed much. From a bullish point of view, it now needs to show some follow-through on the upside. As a minimum, we would look for a daily close above 1.3550 resistance to turn bullish on this pair, while a move above its recent high of 1.3668 would likely signal the end of the bearish trend.

As traders, it is important to take no chances and trade what’s in front of you. Therefore, take it from one level to the next while price remains inside the consolidation range. Once it breaks higher, only then swing/position trading can be considered.

Source: TradingView.com

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