USD/CAD rallies to new two-year highs at around 1.3467 post-Fed decision

• As widely expected, an aggressive Fed rate hike bolstered the greenback.
• FOMC’s members updated their projections for the end of 2022 of the Federal funds rate (FFR) to 4.4%.
• The USD/CAD extended its gains after Chair Powell’s press conference, climbing towards its daily high above 1.3460s.

The USD/CAD advances for the second straight day after the US Fed Chair Jerome Powell and Co. decided to hike rates by 0.75% at their September meeting, as expected. Worth noting that Fed policymakers opened the door for further tightening, as shown by the Summary of Economic Projections (SEP) median, with most participants expecting rates to end in 2022 at around 4.4%. At the time of writing, the USD/CAD is trading at 1.3464, above its opening price by 0.76%.

USD/CAD climbed to two-year highs amidst a buoyant US dollar

During the day, the financial markets got what they were expecting: a hefty rate hike by the Fed. Additionally, Fed officials acknowledged that spending and production are moderating while emphasizing the robustness of the labor market. The committee expressed that inflation remains high due to imbalances between supply and demand.

At the meeting, Fed officials updated its economic projections for the rest of 2022, alongside adding projections for 2025. In 2022, the FOMC estimates that the Federal funds rate (FFR) would finish at 4.4%, growth is estimated at around 0.2%, while the unemployment rate is expected to rise by 3.8%.

At the same time, the committee estimates that inflationary pressures could peak at around 5.4% in the PCE reading, while core PCE is estimated to rise by 4.5%.

In the press conference, Jerome Powell expressed that “we have got to get inflation behind us” while reiterating that he would do it in a “painless” way if there were one. Nevertheless, he said that “there isn’t” while adding that “failing to restore price stability” would be more painful than what the Fed has done.

As a reflection of that, the US Dollar Index, a gauge of the buck’s value vs. a basket of six currencies, edged higher by 1%, refreshing two-decade highs at around 111.578, while US Treasury bond yields in the short end of the curve rose, with 2s finishing above the 4% threshold.

Therefore, the USD/CAD extended its gains during the day, after diving towards its daily low at 1.3357, before gaining more than 100 pips towards the end of the trading session.

What to watch

An absent Canadian calendar would keep USD/CAD traders leaning towards further US economic data. On Thursday, the US docket will feature unemployment claims alongside the US Current Account and the Kansas City Fed Manufacturing Index.

USD/CAD Key Technical Levels