Almost all dollar pairs of the "major group" are now trading flat, starting from the boundaries of a narrow price range. Thus, the EUR/USD pair narrowed the range to 1.1280-1.1330, the GBP/USD pair fluctuated in the 1.3200-1.3260 range, USD/CHF at 0.9200-0.9260, USD/JPY at 113.30-113.70.
And only the Canadian dollar, paired with the US currency, has been actively and "irrevocably" losing its position for several days: the USD/CAD pair has been showing a pronounced upward trend since December 8. So, if last Wednesday the loonie was at 1.2607, then today's high corresponds to 1.2850. The pair "walked" almost 250 points without encountering any distinct resistance. The pair's growth is almost recoilless, despite the fact that the US dollar index fluctuates in flat, reflecting the cautious attitude of traders to the US currency. This suggests that USD/CAD is growing mainly due to the weakening of the loonie, and not due to the strengthening of the greenback. And if the Federal Reserve does not disappoint the dollar bulls tomorrow, the pair will rush up again to the main resistance level of 1.2920 (the upper line of the Bollinger Bands indicator on the weekly chart).
The Canadian dollar began to actively lose its positions after the announcement of the results of the Bank of Canada's December meeting. Contrary to hawkish expectations, the Canadian central bank did not force events. The central bank took a wait-and-see attitude and voiced vague formulations regarding the prospects of monetary policy. Bank of Canada Governor Tiff Maklem, emphasized the existing risks, while overshadowing the successes of the national economy. In particular, the central bank indicated in an accompanying statement that large-scale flooding in one of the regions of Canada "will worsen disruptions in supply chains and reduce demand for some services." The members of the central bank also mentioned the emerging strain of the Omicron coronavirus – in their opinion, it can also put pressure on economic growth.
In other words, the Bank of Canada did not meet the expectations of many traders, although at the previous October meeting, the central bank "swaggered" with a hawkish attitude. Macklem then assured market participants that the central bank could raise the rate "earlier than previously expected." Given the fact that the central bank prematurely curtailed the stimulus program (in October), traders then assumed that the central bank would decide on this step in the first half of next year, thereby outstripping the US Fed.
In fact, the Bank of Canada refuted these assumptions at the December meeting. Macklem made it clear that he has no intentions of "running ahead of the locomotive", tightening the parameters of monetary policy before the Fed. The December rhetoric of the head of the central bank dissonated with the results of the October meeting. In particular, in October, the Canadian central bank unexpectedly announced the end of the stimulus program, while the Fed only intended to begin a gradual normalization of monetary policy in November. Now, the Bank of Canada has "given way", while taking a cautious and wait-and-see attitude.
In general, the Canadian central bank is inclined to launch a monetary policy tightening cycle much earlier than many of its colleagues, with the exception of the Fed and the Reserve Bank of New Zealand. Therefore, in the coming months, the loonie will dominate in many cross-pairs (primarily in pairs with the euro and the yen). But as for USD/CAD, here the loonie will move in the wake of the greenback.
Judging by the dynamics of the pair, traders are not too concerned about the outcome of the Fed's December meeting – long positions are clearly a priority. And yet, in the context of the near-term prospects of USD/CAD, much will depend on how aggressive a position the members of the US central bank will take tomorrow. The majority of economists polled by Reuters said that the Fed is likely to raise the interest rate only in the third quarter of next year. At the same time, almost every one of them admitted the possibility that the Fed could start tightening monetary policy earlier. Given the rhetoric of Fed Chairman Jerome Powell, the US central bank will complete QE in March 2022. Thus, he will clear the way for a rate hike in the first half of next year. Such a scenario cannot be ruled out, especially against the background of record inflation in the United States. On the other hand, earlier Powell urged not to perceive the fact of curtailing QE as a "go-ahead" to launch the process of tightening policy.
In other words, the intrigue remains here, so it is quite risky to open long positions on the USD/CAD pair at the moment, despite the confident upward trend. The upcoming "flights" of the greenback will also affect the loonie – and it is far from a fact that the US dollar will end tomorrow as the favorite of the foreign exchange market. Therefore, today it is most expedient to take a wait-and-see attitude for the pair. If, following the results of the December meeting, the Fed confirms its hawkish attitude (and not only with regard to QE, but also with regard to the rate), the upward trend will resume with renewed vigor.
Technically, the USD/CAD pair is trading between the middle and upper lines of the Bollinger Bands indicator (on the daily chart), as well as above all the lines of the Ichimoku indicator (including the Kumo cloud), which demonstrates the bullish Parade of Lines signal. In other words, the technical picture indicates the priority of long positions. The first target of the upward movement is the resistance level of 1.2880, which coincides with the upper line of the Bollinger Bands indicator on the D1 timeframe. The main target is the level of 1.2920 - this is also the upper line of the Bollinger Bands indicator, only on the weekly chart.
