USD/CAD Price Forecast: Why does debate over the size of the Fed’s next rate hike favour further gains?

Pressure on the Canadian Dollar from falling oil prices lifts USD/CAD sharply towards 1.4213.
Concerns over aggressive Fed policy tightening lend support to the US Dollar.
October's US CPI figures continued to exceed expectations.

USD/CAD is gaining ground as several headwinds keep the Canadian Dollar (CAD) on the back foot against the US Dollar (USD). Oil prices have weakened on hopes of a United States (US)-Iran deal, while renewed concerns over aggressive monetary tightening by the Federal Reserve (Fed) have also supported the pair.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

At the time of writing, USD/CAD has advanced 0.17% to around 1.4213, marking its highest level in over three weeks. Meanwhile, the US Dollar Index (DXY), which measures the Greenback against six major currencies, is trading near 102.37, a gain of 0.15%.

Falling oil prices reduce the attraction of currencies belonging to net energy-exporting economies such as Canada. From its recent highs of 104.03, the WTI Oil price has declined almost 18% to around $85.35.

With a Fed December hike seen as assured, will the increase be 25 or 50bps?

TD Securities has reiterated that “today's data certainly seals a Dec rate hike by the Fed.” In the bank's assessment, the “strong upside surprise in the US CPI makes a December hike all but certain,” leaving the size of the increase as the key question. Its strategists observe that “after Waller's speech, the debate has now shifted to whether the FOMC will go 25 or 50bps,” with Governor Waller's comments before the CPI release bringing the possible need for a “catch-up” move into sharper focus. The choice now, TD Securities writes, is whether to deliver a “catch-up 50bps rate hike in December, or whether to maintain course with a 25bps rate increase and provide strong guidance toward a potential January follow-through.” Their current preference remains unchanged: “we still favor a 25bp hike with a rising risk of another hike in January.”

USD/CAD Technical Analysis: Can Buyers Sustain the Uptrend?

Trading at 1.4212 on the daily chart, USD/CAD retains a bullish near-term outlook. The advance has carried the pair above the 20-day Exponential Moving Average (EMA) at 1.4085, which now provides support. At 63.9, the Relative Strength Index (RSI) remains in positive territory but has yet to indicate overbought conditions. This suggests that buyers remain in control, although the recent recovery leaves room for consolidation.

The nearby pivot around 1.4210 offers immediate downside support, with the 20-day EMA at 1.4085 providing the next level to watch. Should the pair pull back, buying interest could return at that moving average. As this dataset shows no significant technical resistance directly above current levels, attention centres on whether bulls can hold these supports and carry the broader uptrend further.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

US Dollar: Frequently Asked Questions

What role does the US Dollar play?

Alongside its status as the official currency of the United States of America, the US Dollar (USD) serves as the ‘de facto’ currency in a significant number of other countries, circulating together with local banknotes. Data from 2022 show that it accounts for over 88% of global foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion, making it the world's most actively traded currency. The USD replaced the British Pound as the world's reserve currency after the Second World War. Gold backed the US Dollar for most of its history, until the Bretton Woods Agreement in 1971 brought an end to the Gold Standard.

How does Federal Reserve policy affect the US Dollar?

Monetary policy set by the Federal Reserve (Fed) is the single most influential factor in the US Dollar's value. Achieving price stability by controlling inflation and promoting full employment are the Fed's two mandates. Adjustments to interest rates are its main means of pursuing both objectives. If prices climb too rapidly and inflation exceeds the Fed's 2% target, the central bank raises rates, supporting the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut interest rates, putting pressure on the Greenback.

How does Quantitative Easing work, and what does it mean for the US Dollar?

When conditions become extreme, the Federal Reserve can print additional Dollars and introduce quantitative easing (QE). Through QE, the Fed substantially expands the flow of credit in a financial system that has become stalled. This unconventional policy is used when credit dries up because banks, fearing counterparty default, are unwilling to lend to one another. It is a last resort when interest rate cuts alone are unlikely to deliver the required outcome. To counter the credit crunch during the Great Financial Crisis in 2008, the Fed turned to QE as its preferred tool. The process entails printing more Dollars and spending them on US government bonds, purchased mainly from financial institutions. The US Dollar usually weakens as a result of QE.

How does Quantitative Tightening work, and what does it mean for the US Dollar?

Under quantitative tightening (QT), the reverse process, the Federal Reserve ceases bond purchases from financial institutions. It also refrains from using principal repaid on maturing bonds in its portfolio to make fresh purchases. This policy generally supports the US Dollar.