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USDCAD Breakdown-Retest-Continuation trade setup

The loose monetary policy from the federal reserve is set to continue for several months or maybe longer if Substantial Progress in the employment and inflation data is not observed. The Canadian economy has started to show signs of inflation dropping and that is likely down to the depreciation in oil this last month and with base effects from the pandemic diminishing. A weaker US dollar would be supportive of oil prices and that would benefit the CAD.

USDCAD Forex Analysis

Last night the FOMC left rates and the pace of asset purchases unchanged and Fed Chair Powell was perceived to be more Dovish than in the previous 2 meetings. The post-meeting statement stated, “the economy has made progress” (but not substantial) and that the committee would continue to assess progress “in coming meetings”. The statement reiterated that inflation is still “transitory” and likely to stay above 2% for longer. Analysts this morning are talking up a possible rate hike announcement in December with the Jackson Hole symposium being the next potential talk of taper opportunity. Chair Powell has often said that the forward guidance would come very early. The market reaction has been to sell the US dollar rather than take analyst's Hawkish view for a December tightening of policy. Which has been great for the bounce in the commodity pairs and materials.

Today’s GDP data release could show that the US economy is back and surpassed the pre-pandemic levels.

Before the FOMC conclusion, Canadian CPI came in lower than market estimates at 0.3% m/m and 1.7% y/y but this didn’t have a negative impact on the CAD.

Traders sentiment on the ActivTrader platform is very bullish the USDCAD and with 80% long, I am keen to look for reasons to fade these positions with a short.

The weakening US dollar has been supportive for the energy complex, with Oil now finding it easier to break out of the recent consolidation range. Oil is trading above the 20, 50, and 200 exponential moving averages and momentum is still pointing higher. Price would need to get back above the recent swing high to make a bullish structure, so the USDCAD isn’t guaranteed to drop just yet.

The USDCAD daily chart shows prices now under the 200 ema and finding support between the 20 and 50 period moving averages. The rising trend line from the start of June has been broken so there could be a trade on the retest of that, ready for a continuation lower.

Using the H4 chart, it is clear to see that price has currently found support at the 200 ema, and that if we were to rise back up and test the breakout level of the trend line, the 20 and 50-period ema’s would be the resistance levels to trade short from. Timing the trade on the H4 could be done using the stochastic oscillator which I have set to 10,3,3 and a reading above 70 would be the signal to get ready for a reversal candle.

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