Date: 19 Dec 2018

Today, the Federal Open Market Committee (FOMC) will conclude the two-day meeting on interest rate policy and is expected to raise interest rates for the fourth time this year.

The Federal Reserve (Fed), which has been raising interest rates in 25 basis points (bps) increments since December 2015, has assured to raise rates progressively in the direction of a neutral setting to preserve the economy from overheating. Many economists also expect additional increases next year although at a slower pace.

US President Donald Trump, who has made the economy a key part of his political platform continues to pressure the Federal Reserve, warning the Fed’s board not to “make yet another mistake” ahead of an expected interest rate hike.

The US consumer price index (CPI) fell to 2.2% year-on-year in November, comparing to the 2.5% registered in the previous month and in line with analysts’ estimates of 2.2%.  It is the lowest reading since February 2018. The CPI is a key indicator to measure inflation and changes in purchasing trends and a high reading is seen as positive for the USD, while a low reading is seen as negative.

The Bank of Canada (BoC) kept the interest rate unchanged at 1.75% on December 5th after hiking 25 bps on the previous meeting, as widely expected by market analysts. It remained the highest rate since December 2008. Policymakers said more interest rate hikes will be required to keep inflation at a neutral range of 2.0% target and that will depend on factors, which include consumption and housing, global trade policy developments, oil price shock, the evolution of business investment, and the Bank’s assessment of the economy’s capacity. The rise of the interest rates or a hawkish view about the inflationary outlook of the economy it is seen as positive for the CAD. On the other hand, a dovish view on the Canadian economy and maintaining interest rate unchanged, or cuts of the interest rate it is seen as negative.

Since the beginning of the year 2018 until last Tuesday close, the USDCAD remains positive with a gain of almost 7.5% and after the beginning of December, managed to advance more than 1.5%. Nonetheless, since the beginning of the week the currency pair is above water with a gain of 0.6% although, on the daily time-frame, the currency pair closed in the green with a 0.38% gain. Furthermore, the currency pair remains in a bullish phase since mid-October.

On yesterday session, the USDCAD initially fell but found enough buying pressure near 1.3392 to trim all of its losses and closed near the high of the day, in addition, managed to close above Monday high, which suggests a strong bullish momentum.

The stochastic is showing an overbought market although is still displaying a bullish of momentum.

In December, the currency pair seems to be developing an ascending triangle, which is a bullish chart pattern that is easily recognizable by the right triangle created by two trendlines. An ascending triangle is generally considered to be a continuation pattern, meaning that it is usually found amid a period of consolidation within an uptrend. Yesterday, the USDCAD seems to have broken to the upside the ascending triangle with traders aggressively buying the currency pair and send the price higher on high volume.

 

USD/CAD Daily Candlestick Chart

USD/CAD Daily Candlestick Chart

 

Market Events to Watch: 

Wednesday, December 19 at 13:00 GMT (08:00 ET): The Statistics Canada is scheduled to release the consumer price index (CPI) year-on-year in November, which is expected to drop to 1.9%, compared to 2.4% registered in the previous period. The purchasing power of CAD is dragged down by inflation. The Bank of Canada (BoC) aims at an inflation range (1%-3%). Generally, a high reading is seen as anticipatory of a rate hike and is positive for the CAD while a low reading is negative.

Wednesday, December 19 at 19:00 GMT (14:00 ET): The US Federal Reserve (Fed) is scheduled to release the interest rate, which is expected to rise to 2.5%, compared to the previous rate set at 2.25% on the last Federal Open Market Committee (FOMC) meeting. Higher interest rates make borrowing more expensive, slowing economic activity and curbing price inflation. There have already been slowdowns some sectors in the US, such as home and car sales, where higher interest rates have led some price-conscious consumers to pull back.

Following the Fed’s rate decision, the FOMC releases its statement regarding monetary policy. The statement may influence the volatility of USD and determine a short-term positive or negative trend. A hawkish view is considered as positive for the USD, whereas a dovish view is considered as negative.

Wednesday,  19:30 GMT (14:30 ET): The Federal Open Market Committee (FOMC) is scheduled for a press conference. The press conference is about an hour long consisting of two parts; the first a prepared statement is read and then the conference is open to press questions. The questions often lead to unscripted answers that may create heavy market volatility.

Friday, December 21 at 13:30 GMT (08:30 ET): The Statistics Canada is scheduled to release the gross domestic product (GDP) month-on-month in October, which is expected to increase to 0.2%, compared to the -0.1% registered in the previous period. The GDP is considered a broad measure of Canadian economic activity and health. Normally, a rising trend has a positive effect on the CAD, while a falling trend is seen as negative for the CAD.

Friday, December 21 at 13:30 GMT (08:30 ET): The Statistics Canada is scheduled to release the retail sales month-on-month in October, which is expected to increase to 0.4%, compared to the 0.2% registered in the previous period. The retail sales are often taken as an indicator of consumer confidence. It shows the performance of the retail sector in the short term. Mostly, the positive economic growth anticipates bullish movements for the CAD.

On Friday, December 21 at 13:30 GMT (08:30 ET): The US Bureau of Economic Analysis is scheduled to release the Gross Domestic Product (GDP) Annualized in the third quarter, which is expected to come in unchanged at 3.5%, the same as registered in the previous period. The GDP Annualized is a gross measure of market activity because it indicates the pace at which a country’s economy is growing or decreasing. Generally, a high reading or a better than expected number is seen as positive for the USD, while a low reading is negative.

On Friday, December 21 at 13:30 GMT (08:30 ET): The US Census Bureau is scheduled to release the durable goods orders in November, which is expected to rise to 1.2%, comparing to the -4.4% registered in the previous period. The durable products often involve large investments they are sensitive to the US economic situation. The final figure shows the state of US production activity. Generally, a high reading is positive for the USD, while a low reading is negative.

On Friday, December 21 at 15:00 GMT (10:00 ET): The US Bureau of Economic Analysis is scheduled to release the Core Personal Consumption Expenditure – Price Index year-on-year in November, which is expected to rise to 1.9%, comparing to the 1.8% registered in the previous period. The “Core” excludes seasonally volatile products such as food and energy in order to capture an accurate calculation of the expenditure. It is a significant indicator of inflation. A high reading is positive for the USD, while a low reading is negative.

 

Written by Hugo O’Neill, External Analyst

 

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