The USD/CAD pair is attracting some selling at the start of a new week, snapping a nine-day winning streak to its highest level since December 5, around the 1.3920 area, which it touched on Friday. The intraday decline is supported by broad-based weakness in the US Dollar (USD) and is pulling spot prices below the 200-day simple moving average (SMA) in the last hour.
Federal Reserve Chairman Jerome Powell said the threat of criminal charges is the result of the central bank setting interest rates based on its best assessment of what will serve the public, rather than following the president’s preferences. This adds to concerns about the Fed’s independence and ability to operate free from political interference, pulling the US dollar away from its highest level since December 5, which it reached on Friday, and putting downward pressure on the USD/CAD pair.
Meanwhile, US President Donald Trump said on Sunday that he was considering a range of responses to the unrest sweeping Iran, including possible military action. This comes on top of the long-running war between Russia and Ukraine, and keeps geopolitical risks alive. This, coupled with lower bets on more aggressive policy easing by the Fed, could act as a tailwind for the US dollar. Aside from this, an intraday pullback in crude oil prices could undermine the commodity-linked Canadian dollar and support the USD/CAD pair.
The Canadian Dollar (CAD) is under additional pressure due to signs of weak domestic labor market conditions, tempering bets on a tougher Bank of Canada (BoC) policy. In contrast, the closely watched US Non-Farm Payrolls (NFP) report on Friday showed that the unemployment rate fell to 4.4% in December and eased concerns about the labor market report, strengthening the Fed’s case for keeping interest rates higher for longer. This may help limit deeper USD losses and requires caution from USD/CAD bears.
Traders may also choose to move to margin ahead of the release of the latest US inflation figures – the Consumer Price Index (CPI) and Producer Price Index (PPI) on Tuesday and Wednesday respectively. This in turn makes it wise to wait for a strong sell-off before confirming that the USD/CAD pair has reached the near-term top and positioning itself for any meaningful corrective decline.
Federal Reserve Bank Questions and Answers
Monetary policy in the United States is shaped by the Federal Reserve Bank (Fed). The Federal Reserve has two missions: achieving price stability and promoting full employment. The primary tool for achieving these goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, it raises interest rates, which increases borrowing costs throughout the economy. This causes the US dollar (USD) to strengthen because it makes the United States a more attractive place for international investors to park their money. When inflation falls below 2% or when the unemployment rate is very high, the Fed may lower interest rates to encourage borrowing, which affects the dollar.
The Federal Reserve (Fed) holds eight policy meetings annually, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC meeting is attended by twelve Fed officials – the seven members of the Board of Governors, the New York Fed president, and four of the remaining eleven regional Fed presidents, who serve one-year terms on a rotating basis.
In extreme cases, the Fed may resort to a policy called quantitative easing (QE). Quantitative easing is the process by which the Federal Reserve dramatically increases the flow of credit into a stuck financial system. It is a non-standard policy measure used during crises or when inflation is very low. It was the Fed’s weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. Quantitative easing usually weakens the US dollar.
Quantitative tightening (QT) is the reverse process of quantitative easing, where the Fed stops purchasing bonds from financial institutions and does not reinvest capital from bonds it holds outstanding, to purchase new bonds. This is usually positive for the value of the US dollar.
