Loonie's Strength Fuels Third Consecutive Bearish Session for USD/CAD
The USD/CAD currency pair is experiencing a bearish trend, with the Loonie's strength driving the pair down. The daily chart reveals a decisive downward trajectory, as the price trades below both the 50-day Exponential Moving Average (EMA) at 1.3757 and the 200-day EMA at 1.3854. This confirms sustained selling pressure. The pair peaked near 1.3928 in early January, but has since rolled over into a series of lower highs and lows. The Canadian Dollar's recent rally has pushed USD/CAD down 0.25% on Tuesday, approaching the recent swing low near 1.3481.
The sell-off from the January highs has created a descending channel on the daily timeframe, with the 50 EMA curving lower and converging with the 200 EMA, suggesting a potential bearish crossover. Support levels are at 1.3481 (the chart low) and the psychological 1.3500 mark. Resistance is clustered around 1.3600 to 1.3650, where prior support has flipped and a recent consolidation zone formed in early February. The Stochastic Oscillator (14, 5, 5) is in the middle, having turned lower from the midline without reaching overbought territory, indicating that bearish momentum is reasserting after a brief early-February corrective bounce. That bounce stalled near 1.3700, producing rejection candles with long upper wicks, suggesting persistent selling interest on rallies toward the declining moving averages.
The Loonie's three-day rally has been supported by stronger Canadian labour data, with January unemployment falling to 6.5% and wage growth holding firm at 3.3%. This has repriced Bank of Canada (BoC) rate cut expectations lower and kept Canadian yields relatively attractive. Conversely, on the US side, Tuesday's weaker-than-expected Retail Sales (0.0% versus 0.4% forecast) and softer Employment Cost Index (0.7% versus 0.8%) have added further weight to the US Dollar. A daily close below 1.3481 would confirm a fresh leg lower and open the path toward the 1.3400 area, while any corrective rally would need to reclaim 1.3650 to shift the near-term bias.
The US Dollar (USD) is the official currency of the United States of America and the 'de facto' currency of several other countries. It is the most heavily traded currency globally, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to 2022 data. Following World War II, the USD replaced the British Pound as the world's reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard was abolished.
The Federal Reserve (Fed) shapes monetary policy, which is the most significant factor impacting the US Dollar's value. The Fed has two mandates: price stability (controlling inflation) and fostering full employment. Its primary tool is adjusting interest rates. When inflation rises above the Fed's 2% target, the Fed raises rates, strengthening the USD. Conversely, when inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Fed can print more Dollars and enact quantitative easing (QE), a non-standard policy measure used when credit has dried up. QE involves the Fed printing more Dollars and buying US government bonds, predominantly from financial institutions. It usually leads to a weaker US Dollar. Quantitative tightening (QT) is the reverse process, where the Fed stops buying bonds and does not reinvest principal from maturing bonds. It is typically positive for the US Dollar.
