USD/CAD retreats after struggling at 1.2900, hovers around 1.2850s on a weak US dollar

• The Loonie recovers some ground vs. the greenback and gains some 0.28%.
• US dollar bulls take profits ahead of the Federal Reserve meeting.
• Fitch Ratings cut China’s growth from 4.8% to 4.3%, weighing on market sentiment.
• USD/CAD Price Forecast: Remains upwards, though a slump towards 1.2777 is on the cards.

The USD/CAD slid as the greenback weakens ahead of the Federal Reserve’s monetary policy decision, to be known on Wednesday, as USD bulls book profits and get to the sidelines to assess the direction, pace of QT, and how many 50-bps hikes would the Fed deliver in the year. At the time of writing, the USD/CAD is trading at 1.2854, recording decent losses of 0.17%.

The US dollar weakens ahead of the Fed

Meantime, the US Dollar Index, a gauge of the greenback’s value, slumps 0.25%, sitting at 103.346, also weighed by falling US Treasury yields. The 10-year benchmark note sits at 2.920%, retreated eight bps from the YTD high at 3%, reached on Monday.

The fluctuation of European and US equities reflects a mixed sentiment. Additionally, China’s zero-tolerance Covid-19 threatens to slow the global economic recovery after authorities could probably reinstate strict measures in Shanghai. Meanwhile, according to Bloomberg, Fitch Ratings cut its forecast for China’s 2022 gross domestic product growth from 4.8% to 4.3% due to Covid-19 lockdowns that have hobbled the economy.

On the macroeconomic front, the Canadian docket would feature the Bank of Canada Governor, Rogers. On the US front, US Factory Orders for March rose by 2.2% m/m, higher than the 1.1% estimates. At the same time, March’s US JOLTs Job Openings came at 11.549M, beating expectations of 11M, showing the tightness of the US labor market.

That said, USD/CAD traders would need to be aware that once the Fed hikes 0.50%, both countries will have interest rates at 1%, which could favor the USD in the long term. Why? Because, as Brown Brothers Herriman (BBH) analysts noted, World Interest Rates Probabilities (WIRP) “suggests three more 50 bp hikes in June, July, and September that would take the Fed Funds rate up to 2.25-2.50%. After that, two 25 bp hikes are priced in for November and December that would take the Fed Funds rate up to 2.75-3.0%.” They added that “there is a greater than 50% chance of a final 25 bp hike in February that would take Fed Funds up to 3.0-3.25%.”

USD/CAD Price Forecast:  Technical outlook

The USD/CAD is upward biased, though Tuesday’s price action illustrates how the greenback’s bulls take profits ahead of the Fed’s meeting. After the USD/CAD reached a YTD high at 1.2913, it is threatening to dip towards the 1.2800 mark, further confirmed by the slope of the Relative Strength Index (RSI) aiming downwards, shy of reaching overbought territory at 63.85.

With that said, the USD/CAD first support would be 1.2800. A break below would expose April’s 27 daily low at 1.2777, followed by April’s 29 swing low at 1.2718.