USDCAD pulls back from 1.39 after another attack on Fed independence. What’s next?

FUNDAMENTAL
OVERVIEW

USD:

The greenback weakened
across the board today following the news of the US Department of Justice
subpoenaing the Federal Reserve in an unprecedented move that escalates the
ongoing conflict between President Trump and Fed Chair Powell for not lowering
interest rates faster.

The official reason is that
the DOJ is focusing on the Federal Reserve headquarters renovation to see
whether Powell made misleading or false statements to the Senate Banking
Committee regarding the scale, costs and luxury features of the project.

In reality, everybody knows
that this is just a political pretext to intimidate the Fed Chair and force him
to cut interest rates faster. We have already seen this kind of intimidation
with Fed Governor Cook last year when Trump tried to fire her for cause without
success as we continue to await the US Supreme Court decision on that case.

The US Dollar sold off on
the news because a potential loss of Fed independence increases the risk of
uncontrolled inflation in the future leading to a debasement. The probability
of the loss of Fed independence remains very low though as the consequences
would be too big not only for the US but the global economy as a whole.

Tomorrow, we have the US
CPI report and that could be a major market-moving release. A hot report will
likely trigger some hawkish repricing in interest rate expectations and support
the US Dollar. On the other hand, soft data should keep the market on expecting
at least two rate cuts by the end of the year potentially weighing on the
greenback further. The outlook for the USD remains neutral/bearish.

CAD:

On the CAD side, the
Canadian labour market report on Friday didn’t change anything for the BoC. In
fact, despite the headline employment change beating expectations, wage growth
moderated and the unemployment rate increased (although that came with an
increase in the participation rate). Overall, it was a good report but not something
that would change the BoC’s stance.

As a reminder, the BoC held
interest rates steady at the last policy meeting but didn’t validate the
market’s rate hike bets just yet. In fact, the central bank kept a cautious
tone and highlighted the weak details in the last GDP and employment reports
despite acknowledging the improvements.

The last Canadian inflation
report saw the Trimmed Mean Y/Y falling to 2.8%, 0.1% lower than consensus and
0.2% than the prior month. That led to a slightly dovish repricing in interest
rate expectations. The market now sees a total of 11 bps of tightening by
year-end. The outlook for the CAD remains neutral/bullish.

USDCAD TECHNICAL
ANALYSIS – DAILY TIMEFRAME

On the daily chart, we can
see that USDCAD squeezed higher into the 1.39 handle and it’s now pulling back
following the DOJ news. The sellers stepped in at the 1.39 resistance with a
defined risk above it to position for a pullback to the 1.38 handle. The
buyers, on the other hand, will have a better risk to reward setup around the
1.38 support to target the 1.41 level next.

USDCAD TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAME

On the 4 hour chart, we can
see that we have an upward trendline defining the bullish momentum. The buyers
will likely lean on the trendline with a defined risk below it to keep pushing
into new highs. The sellers, on the other hand, will look for a break lower to
increase the bearish bets into the 1.38 support next.

USDCAD TECHNICAL
ANALYSIS – 1 HOUR TIMEFRAME

On the 1 hour chart, we can
see that we have another minor downward trendline defining the current pullback
into the major trendline. The buyers will have a better risk to reward setup around
the major trendline and will likely increase the bullish bets on a break above
the minor counter-trendline. The sellers, on the other hand, will keep on leaning
on the minor downward trendline to keep pushing into new lows targeting a break
below the major trendline. The red lines define the average daily range for today.

UPCOMING CATALYSTS

Tomorrow we have the US CPI report. On Wednesday, we get the November US Retail
Sales and US PPI reports, so it’s going to be old data. We also have a
potential US Supreme Court decision on Trump’s tariffs. On Thursday, we get the
latest US Jobless Claims figures.