USD/CAD Outlook Clouded By RSI Divergence Ahead Of FOMC Rate Decision

USD/CAD struggles to extend the series of higher highs and lows from the monthly low (1.2589) as the US Dollar weakens against its major counterparts, and the Federal Open Market Committee (FOMC) interest rate decision may keep the exchange rate under pressure as the central bank appears to be in no rush to scale back its emergency measures.

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Image of DailyFX economic calendar for US

It seems as though the FOMC will largely endorse an outcome-based approach in 2021 as the central bank plans to “achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time,” and Chairman Jerome Powell and Co. may continue to lay out a dovish forward guidance as “some participants noted that the Committee could consider future adjustments to its asset purchases—such as increasing the pace of securities purchases or weighting purchases of Treasury securities toward those that had longer remaining maturities—if such adjustments were deemed appropriate.”

In turn, key market themes may continue to sway USD/CAD as the FOMC relies on its non-standard tools to achieve their policy targets, and the tilt in retail sentiment also looks poised to persist as traders have been net-long the pair since May 2020.

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Image of IG Client Sentiment for USD/CAD rate

The IG Client Sentiment report shows 58.66% of traders are currently net-long USD/CAD, with the ratio of traders long to short standing at 1.42 to 1. The number of traders net-long is 10.17% higher than yesterday and 4.48% higher from last week, while the number of traders net-short is 7.82% lower than yesterday and 5.65% higher from last week.

The rise in net-short interest has helped to alleviate the crowding behavior in USD/CAD as 76.03% of traders were net-long the pair last week, but the rise in net-long interest suggests the tilt in retail sentiment is likely to persist even though the exchange rate struggles to extend the series of higher highs and lows from the monthly low (1.2589).

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