USD/CAD Rate Rebound Emerges Following Bullish Outside Day Formation

USD/CAD trades to a fresh weekly high (1.2685) after retracing the decline following the semi-annual testimony with Federal Reserve Chairman Jerome Powell, and the Canadian Dollar may face a larger correction during the first week of March as the rebound in the exchange rate coincides with the recent weakness in global equity prices.

Swings in risk sentiment may continue to sway USD/CAD as the US Dollar still reflects an inverse relationship with investor confidence, but the advance from the February low (1.2468) may turn out to be an exhaustion of the broader trend rather than a change in behavior like the price action seen in 2020.

It seems as though the Federal Open Market Committee (FOMC) is in no rush to alter the path for monetary policy as New York Fed President John Williams insists that “GDP growth this year could be the strongest we've seen in decades,” with the permanent voting member on the FOMC going into say that “fiscal support, combined with highly favorable financial conditions and steady progress on vaccinations, are all reasons to be optimistic the economy will experience a strong recovery this year.”

Nevertheless, Williams emphasizes that the Fed “will continue to watch and learn and remain committed to using our full range of tools to help assure that the recovery will be as robust as possible,” and the dovish forward guidance may keep key market themes in place as the FOMC stays on track 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.”

Image of Federal Reserve balance sheet

In turn, the recent weakness in the Canadian Dollar may turn out to be a correction in the broader trend rather than a change in market behavior as the Fed’s balance sheet climbs to a fresh record high of $7.590 trillion in the week of February 24, but the tilt in retail sentiment persist as traders have been net-long USD/CAD since May 2020.

1 2
View single page >> |

Disclosure: See the full disclosure for DailyFX here.

How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.