The US dollar bounced back sharply on Thursday, a day after the US Federal Reserve issued yet another non-committal statement at the conclusion of its two-day FOMC meeting. That statement extended the environment of dovish uncertainty with respect to Fed monetary policy that has prevailed in the markets in recent weeks, and led to further pressure on the US dollar in the immediate aftermath of its release.
Thursday’s dollar rebound has helped to bring EUR/USD off its long-term highs and USD/CAD off its long-term lows, but this respite for the Fed-pressured US dollar could be short-lived. Friday will bring important GDP releases from both the US and Canada, which could play key roles in the USD/CAD trend going forward. The trend for the currency pair since early May has been unmistakably bearish, characterised by a sharp, relentless plunge. This precipitous fall has been driven largely by a hawkish shift for the Bank of Canada (which raised its overnight rate this month for the first time since 2010) that has occurred during the same period as a generally dovish shift for the Fed.
The latest major culmination of this USD/CAD plummet was when the currency pair hit its key downside target this week at the 1.2500 psychological level, which was a re-test of the lows from more than a year ago, in May of 2016. After falling below 1.2500 on Wednesday’s release of the dovish FOMC statement, Thursday saw a sharp bounce back above the line. Despite this bounce, the trend for USD/CAD continues to be clearly to the downside.
As noted, Friday morning brings key GDP reports from both the US and Canada that could make a significant impact on USD/CAD. For the US, quarterly Advance GDP for Q2 is expected to come in at 2.5% (annualized). For Canada, monthly GDP for May is expected at 0.2%, in-line with the previous month.
From a technical perspective, 1.2500 continues to be the key level to watch amid the GDP releases. Any sustained re-break below 1.2500 could signal an extension of the downtrend towards the next major downside support target around the 1.2200 level. A further move above 1.2500 could suggest a USD/CAD bottoming pattern. In that event, any further break above 1.2650 resistance could push the currency pair back up towards 1.2800 once again.
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