After surging past the key resistance around 1.2800 during the BOC rate statement, USDCAD is forming a bullish flag pattern that suggests potential continuation. After all, the BOC decided to cut interest rates from 0.75% to 0.50% and lowered their growth forecasts.
A break above the flag pattern around 1.2950 could mean a move beyond the 1.3000 major psychological level. The mast of the flag is around 200 pips in height so the resulting breakout could be of the same size.
Take note, however, that stochastic is starting to move down from the overbought zone, which means that selling pressure could pick up. RSI is also on the way down, suggesting a potential move lower. If that happens, USDCAD could make a retracement to the broken resistance around 1.2800 before resuming its climb.
The 100 SMA is also above the longer-term 200 SMA, which suggests that the ongoing rally could carry on.
USDCAD Fundamental Factors
As mentioned, the BOC decided to ease monetary policy in their latest statement, citing the downturn in the U.S. and China as some of the factors supporting their downbeat outlook. Governor Poloz added that weaker than expected investment in oil-related sectors could mean weaker growth prospects.
Meanwhile, Fed Chairperson Yellen sounded confident about the U.S. economy in her latest testimony. While data from the US economy hasn’t been so impressive and most market watchers already adjusted their rate hike expectations to December, Yellen’s reassuring remarks were enough to draw more dollar bulls to the game.
Event risks for this setup include the US CPI and Canadian CPI releases towards the end of the week, with weak readings from Canada and improvements in the US likely to spur further gains for this pair. On the other hand, disappointing data from the US and an upbeat inflation report from Canada could spur a short-term retracement for USDCAD.
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