USD/CAD analysis: Canadian CPI, FOMC minutes puts Loonie in sharp focus

• USD/CAD analysis: Outlook will be impacted by upcoming data releases
• Peak interest rates narrative keeping US dollar under pressure
• USD/CAD technical analysis

The weakness in US dollar continues amid expectations that the Federal Reserve is done with interest rate hikes. This is helping to underpin major foreign currencies like the JPY, GBP and CAD. The USD/CAD is an interesting pair to watch as it tests a major support area ahead of the release of Canadian inflation data and FOMC minutes later.

USD/CAD analysis: Why is the dollar weakening?

The continued weakness in the US dollar is attributed to the anticipation that the Federal Reserve has concluded its interest rate hikes. Today's emphasis is on gaining further insights into policymakers' discussions during the Federal Reserve's November meeting through the minutes of that meeting, due for release later on in the day. Traders have factored in expectations of the Fed maintaining unchanged interest rates in December, with some even anticipating rate cuts as early as March, as indicated by the CME's Fed Watch tool. These expectations arose following the release of some weaker-than-expected data last week, including a cooling inflation rate of 3.2% YoY in October and indications of a weakening job market. Despite this, the Federal Reserve remains committed to the notion that interest rates must stay elevated for a prolonged period to curb inflation. Let’s see if that narrative changes if we see further weakness in US data moving forward.

USD/CAD outlook will be impacted by upcoming data releases

The USD/CAD faces interesting few days as we have several data releases that could impact the direction of this currency pair, starting with the release of Canadian CPI shortly.

Here’s this week’s economic calendar relevant to USD/CAD pair:

USD/CAD analysis: Technical levels to watch

Source: TradingView.com

At the time of writing, the USD/CAD was testing the top of the key 1.3650-1.3700 key support range. Previously, this area had acted as resistance, before turning into support in more recent times. Here, we also have a bullish trend line coming into play. But recent price action has been bearish and the USD/CAD has moved below the 21-day exponential moving average, which is not a good sign for bullish momentum.

The USD/CAD has been stuck in a short-term bearish trend ever since it failed to hold the breakout above the high of 1.3862 hit in March, earlier this month. Since then, several support levels have broken and turned into resistance, including 1.3840ish and 1.3775ish. These levels must now be reclaimed by the bulls if we are to see the start of a new uptrend.

All told, the USD/CAD’s directional bias is range bound, with a bearish tilt amid the dollar weakness across the board. But now it must either break below the aforementioned support range between 1.3650 to 1.3700 to trigger further follow-up selling, or start to form a base around current levels to keep the bulls happy. A lot will depend on incoming data, of course.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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