USD/CAD Price Forecast: Eyes a decisive breakout above 200-day EMA

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The USD/CAD pair trades 0.1% higher to near1.3900 during the early European trading session on Thursday.

USD/CAD rises to near 1.3900 as the US Dollar trades higher.
The Fed is unlikely to cut interest rates in the policy meeting later this month.
The rising Canadian jobless rate has been a major drag on the Canadian Dollar.

The USD/CAD pair trades 0.1% higher to near1.3900 during the early European trading session on Thursday. The Loonie pair trades higher as the US Dollar (USD) remains broadly firm on expectations that the Federal Reserve (Fed) will hold interest rates steady in the monetary policy announcement on January 28.

As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally higher close to its monthly high of 99.26.

The expectations for the Fed to leave interest rates steady in the range of 3.50%-3.75% in the policy meeting this month have intensified after the release of the United States (US) Consumer Price Index (CPI) data for December, which showed that price pressures grew steadily.

Meanwhile, the Canadian Dollar (CAD) remains broadly weak as weakening job market conditions have prompted expectations of an interest rate cut by the Bank of Canada in the near term. Statistics Canada showed last week that the Unemployment Rate increased sharply to 6.8% in December from the prior reading of 6.5%.

USD/CAD technical analysis

USD/CAD trades higher to near 1.3900 at the time of writing. The 200-day Exponential Moving Average (EMA) trends marginally lower near 1.3909, keeping rallies contained. Price action hovers around this long-term average, and a decisive close above it would ease downside pressure.

The 14-day Relative Strength Index (RSI) at 61.68 shows improving bullish momentum without reaching overbought.

Measured from the 1.4143 high to the 1.3640 low, the 50% Fibonacci retracement at 1.3891 is under test, while the 61.8% Fibonacci retracement at 1.3951 caps.

Trend confirmation requires a clean break above the 200-day EMA, which could open the way to the psychological level of 1.4000.

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

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.