USD/CAD retreats from near 1.2770s to 1.2710s post-Fed rate hike

• The Federal Reserve hiked rates 25 bps as widely expected, the US dollar strengthened.
• The USD/CAD reacted violently, reaching 1.2777, today’s daily high.
• FOMC voted 8-1 with St. Louis Fed President Bullard favoring a 50 bps hike.

USD/CAD reached a new daily high after the US central bank raised the benchmark interest rate by 25 basis points, as widely estimated, the first hike since December of 2018. As Fed’s Chair Powell speaks, the USD/]CAD is trading at 1.2716.

USD/CAD Market’s reaction

The Loonie weakened severely, reacting upwards and printing a daily high at 1.2777

The British pound dropped from nearly 1.3100 towards 1.3070s once the headline crossed the wires, while the US 10-year Treasury note yield rose to 2.212%, the highest since May 2019.

Summary of remarks of Fed monetary policy statement

Overall, the Fed noted that inflationary pressures remain high courtesy of supply difficulties, the pandemic, increasing energy prices, and broadening inflationary pressures. Additionally, policymakers commented that the implications of the Russian war are “highly uncertain” for the US economy and would likely create additional upward pressure on inflation and weigh on economic activity. Also, Fed officials have signaled the necessity of hiking rates to tame inflation, which was confirmed by the dot-plot, in which the board members forecast at least seven hikes in 2022.

Meanwhile, Fed money market futures are pricing in a 50% chance of a 50 bps rate hike on the May 4 meeting, while the US 10-year T-note yield retreats from daily highs around 2.246% to 2.183%.

Labor market-wise, Fed members forecast the unemployment rate would hit 3.5% by the end of 2022 and 2023. Concerning the reduction of the balance sheet, also known as Quantitative Tightening (QT), officials would expect to begin reducing it at a coming meeting. The Fed added that they would adjust monetary policy stance as appropriate if risks emerge, which could impede the central bank goals.

USD/CAD Price Forecast: Technical outlook

Once the Federal Reserve monetary policy decision is on the rearview mirror, the USD/CAD extends its fall, approaching the 1.2700 mark. In fact, the daily high reached post-Fed, pierced the 38.2% Fibonacci level, though at press time is looking for a re-test of the 50% Fibonacci retracement at 1.2706.

The USD/CAD is upward biased. However, the 1-hour chart shows that the USD/CAD is downward biased in the near term, with hourly simple moving averages (SMAs) above the exchange rate. The USD/CAD first support would be 1.2706, the 50% Fibonacci level. Once cleared, the next support would be the 61.8% Fibonacci at 1.2654, followed by 1.2636, February 10 daily low.