USD/CAD Outlook: Dollar Weakens Amid Fed Rate Cut Bets

• The Canadian dollar strengthened after the Fed signaled looming rate cuts.

• Economists predict a slowdown in Canada’s inflation to an annual rate of 2.9%.

• Oil rose due to attacks by the Iran-aligned Yemeni Houthi militant group on ships in the Red Sea.

Tuesday’s USD/CAD outlook was bearish as the resilient Canadian dollar took the spotlight, outshining the declining dollar. The dollar weakened due to expectations of potential rate cuts by the US Federal Reserve in the coming year. Meanwhile, the Canadian dollar got support from rising oil prices. 

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On Monday, the Canadian dollar dipped slightly against the US dollar. However, it held near its four-month peak, supported by rising oil prices and anticipation of domestic inflation data.

On Friday, the loonie reached its highest level since August 4th at 1.3347. The rise resulted from the Federal Reserve’s signaling of potential interest rate cuts in the coming year, which weighed on the US dollar. 

Meanwhile, economists predict a slowdown in Canada’s inflation to an annual rate of 2.9% in November from October’s 3.1%. Notably, a higher inflation figure could lead the Bank of Canada to maintain current interest rates for an extended period, further strengthening the Canadian dollar. Despite growing optimism about reaching its 2% inflation target, the Canadian central bank has kept the door open for additional tightening.

Elsewhere, oil, a significant Canadian export, saw a 1.5% increase, settling at $72.47 per barrel. This rise was attributed to attacks by the Iran-aligned Yemeni Houthi militant group on ships in the Red Sea, disrupting maritime trade and raising supply costs.

USD/CAD key events today

• Canada’s CPI m/m
• Canada’s median CPI y/y
• Canada’s trimmed CPI y/y

USD/CAD technical outlook: Bearish momentum weakens in the oversold region

On the charts, USD/CAD is recovering after pausing its steep decline at the 1.3350 key support level. However, the bearish bias is still strong because the 30-SMA is above the price and is facing down. At the same time, the RSI is below 50, supporting a bearish trend.

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Nevertheless, there is a chance the bullish move will continue higher. The RSI has made a small bullish divergence in the oversold region. Therefore, bears are exhausted, allowing bulls to retrace the recent move. However, the rebound will likely pause at the resistance zone consisting of the 30-SMA and the 0.382 fib retracement level.

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• Source: https://www.forexcrunch.com/blog/2023/12/19/usd-cad-outlook-dollar-weakens-amid-fed-rate-cut-bets/