USD/CAD rallies to 1.3650 on a buoyant US Dollar and falling oil prices

• US Dollar remains underpinned by a hawkish Federal Reserve 0.50% rate hike.
• The Federal Funds rate is expected to peak at around 5.10%, per the SEP dot plot.
• USD/CAD: The uptrend is intact, though a clear break above 1.3700 could expose the YTD high of 1.3977.

The USD/CAD rebounds around the 20-day Exponential Moving Average (EMA) and climbs more than 100 pips on Thursday, following the last Federal Reserve (Fed) meeting, which witnessed a 50 bps rate hike to the 4.25-4.50% range Wednesday. Therefore, the US Dollar (USD) stages a comeback after the Canadian Dollar (CAD) pushed the pair toward its weekly lows of around 1.3518. At the time of writing, the USD/CAD is trading at 1.3670, above its opening price by 0.92%.

Federal Reserve's officials to lift rates at around 5%

US equities remain on the defensive as investors assess the Fed’s increase in borrowing costs. In the last meeting of the year, the Fed hiked rates and updated its September projection, including an upward revision of the Federal Funds rate (FFR). Policymakers expect the FFR to sit at around 5.1% through 2023, pushing back investors’ speculations for a Fed pivot, even though money markets are pricing in the first rate cut by December of 2023, according to Eurodollar futures, after an estimated peak of the FFR around 5%.

Delving into the Summary of Economic Projections (SEP), the US Gross Domestic Product (GDP) for 2022 is projected at 0.5% and in 2023 at 0.5%, while inflation is expected to fall to 3.5% in 2023 and will hit 2.1% by 2025.

Aside from this, the US economic docket featured November Retail Sales, which took an unexpected dive from -0.1% to a contraction of 0.6% MoM. On the other hand, Initial Jobless Claims came in lower than anticipated - a sign of strength within the labor market affirmed by Fed Chair Powell’s remarks this week.

After an initial decrease of 0.1% in October, US Industrial Production continued to shrink by a further 0.2%, making it two months of decline consecutively – something not seen since 2009’s recessionary period. The Capacity Utilization rate eased from October’s 79.9% to 79.7% in November.

The US Dollar Index (DXY), which tracks the American Dollar value against a basket of six currencies, soar sharply, up by 1.02% at 104.673. Meanwhile, falling oil price, led by the Western Texas Intermediate (WTI), is dropping 0.92%, at $76.69, a headwind for the Canadian Dollar.

USD/CAD Price Analysis: Technical outlook

Although the USD/CAD uptrend remains intact, it should be said that the ongoing rally could halt at around the 1.3689/1.3700 area. However, the Relative Strength Index (RSI) and the Rate of Change (RoC) suggest that buyers are gathering momentum, but a decisive breach above 1.3700 Is needed, so the USD/CAD might test higher prices.

Therefore, the USD/CAD key resistance levels are 1.3700, followed by November’s 3 high of 1.3808, ahead of the YTD high of 1.3977.