USD/CAD Steady Around 1.3700 Before Key Rate Decisions

Key Moments

Consolidation Ahead of Fed and BoC Rate Decisions

The USD/CAD pair is trading in a confined range around 1.3700 in Tuesday’s European session, as market participants look ahead to monetary policy announcements from the Bank of Canada (BoC) and the Federal Reserve (Fed) scheduled for Wednesday. The Canadian dollar remains in a consolidation phase against the US dollar while investors position for potential policy guidance from both central banks.

Expectations are that the BoC and the Fed will keep benchmark interest rates unchanged. However, policymakers are anticipated to emphasize that ongoing tensions in the Middle East have increased the risk that inflation pressures could intensify rather than ease.

Rate Cut Expectations Repriced as Risks Shift

Based on the CME FedWatch tool, market-implied probabilities suggest the Fed is not expected to begin easing policy at any meeting before September. Furthermore, the likelihood of a rate reduction at the September meeting has declined to nearly 50%, down from 73% just one week earlier, indicating a notable reassessment of the policy path.

Rising crude prices, driven by concerns over energy supply disruptions stemming from conflict in the Middle East, have pushed gasoline prices higher in the United States and other major economies. This development threatens to erode household purchasing power and complicates the inflation outlook.

At the time of writing, the US Dollar Index (DXY) – a gauge of the greenback against six major currencies – is trading flat just below the 100.00 level, having given back its earlier intraday advance.

USD/CAD Technical Picture

USD/CAD is trading nearly unchanged around 1.3700 as of the latest pricing. The pair shows a modestly positive bias in the near term, supported by the fact that spot remains above the 20-day Exponential Moving Average (EMA). This EMA has flattened and now sits just below the current level, pointing to a nascent recovery in the short-term trend following last week’s decline.

The 14-day Relative Strength Index (RSI) has been moving within the 40.00-60.00 band for more than six weeks, a configuration that is consistent with range-bound market conditions rather than a strong directional move.

On the upside, initial resistance is located at 1.3715, where recent gains were previously halted. A break above this level would bring the March 3 high at 1.3750 into focus as a more notable barrier. Clearing that resistance could pave the way for a push toward the 1.3800 zone.

On the downside, immediate support is found at the 20-day EMA near 1.3655. A decisive move below this area would expose the 1.3615 level, followed by the 1.3580 region, where earlier lows are clustered. A drop through these supports would likely signal that a more pronounced corrective phase is unfolding.

Fed Policy Framework: Key Concepts for USD Traders

Fed Mandate and Impact on the US Dollar

Monetary policy in the United States is determined by the Federal Reserve. The central bank operates under a dual mandate: maintaining price stability and promoting maximum employment. Its primary instrument for achieving these objectives is the adjustment of interest rates.

When inflation is running above the Fed’s 2% target and price pressures are building too quickly, the central bank raises interest rates, increasing borrowing costs across the economy. Higher rates tend to bolster the US Dollar (USD) by making US assets more attractive to global investors. Conversely, if inflation dips below the 2% target or the Unemployment Rate rises excessively, the Fed can lower rates to stimulate borrowing and economic activity, a move that generally weighs on the greenback.

Frequency of Fed Policy Meetings

The Federal Reserve holds eight scheduled policy meetings each year. At these gatherings, the Federal Open Market Committee (FOMC) reviews economic developments and decides on the appropriate stance of monetary policy.

The FOMC consists of twelve officials: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Federal Reserve Bank presidents, who rotate annually on one-year terms.

Quantitative Easing (QE) and Its Effect on USD

In particularly stressed conditions, the Federal Reserve may implement Quantitative Easing (QE). Under QE, the Fed significantly expands the supply of credit in a stalled financial system. This non-standard measure is typically deployed during periods of severe crisis or very low inflation. It involves the central bank creating additional US dollars and using them to purchase high-quality bonds from financial institutions. Such actions usually exert downward pressure on the value of the US Dollar.

Quantitative Tightening (QT) and the Dollar

Quantitative Tightening (QT) is the opposite of QE. In a QT phase, the Fed ceases purchasing bonds from financial institutions and allows holdings to mature without reinvesting the principal into new securities. This process is generally supportive of the US Dollar, as it tends to reduce liquidity relative to QE conditions.