USD/CAD To Stage Larger Correction On Another Overbought RSI Reading

USD/CAD trades above the 50-Day SMA (1.2226) for the first time since April as the Fed’s Summary of Economic Projections (SEP) forecast two rate hikes for 2023, with the appreciation in the exchange rate briefly pushing the RSI above 70 for the first time since March 2020.

Looming developments in the RSI may show the bullish momentum gathering pace as the oscillator works its way back towards overbought territory, and a move above 70 in the indicator is likely to be accompanied a further appreciation in USD/CAD like the price action seen last year.

However, a recent speech by New York Fed President John Williams suggests the central bank is in no rush to switch gears as the permanent voting member on the Federal Open Market Committee (FOMC) emphasizes that “conditions have not progressed enough for the FOMC to shift its monetary policy stance of strong support for the economic recovery.”

In turn, President Williams reiterates that the FOMC “will maintain its current asset purchase pace until substantial further progress has been made toward its employment and inflation goals,” and it seems as though Chairman Jerome Powell and Co. will stick to the same script at the next interest rate decision on July 28 as the central bank braces for a transitory rise in inflation.

Until then, USD/CAD may stage a larger correction as it trades above the 50-Day SMA (1.2226) for the first time since April, but the crowing behavior carried over from last year looks poised to as traders have been net-long the pair since May 2020.

Image of IG Client Sentiment for USD/CAD rate

The IG Client Sentiment Report shows 69.51% of traders are still net-long USD/CAD, with the ratio of traders long to short currently standing at 2.28 to 1.

The number of traders net-long is 15.46% higher than yesterday and 26.83% lower from last week, while the number of traders net-short is 10.77% lower than yesterday and 4.77% lower from last week. The decline in net-long position has helped to alleviate the tilt in retail sentiment as 73.02% of traders were net-long USD/CAD last week, while the decline in net-short position comes as the exchange rate climbs to a fresh monthly high (1.2487) following the Fed rate decision.

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