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The Dollar remains sideways awaiting the FOMC Minutes

  • The US Dollar Index shows some weakness ahead of the FOMC Minutes from the January meeting, with a slight decline to 104.00.
  • The Fed's intention to keep rates intact could boost the Dollar.

He US Dollar Index (DXY) experienced a slight decline and stood at 104.00 during Wednesday's session.

The US economy, supported by solid data, shows resilience, which is reflected in the strength of the Dollar in 2024. Meanwhile, the Federal Reserve (Fed) maintains a hawkish stance, ruling out short-term rate cuts and favoring keep rates at restrictive levels. The market is progressively aligning with this view, reinforcing expectations of a delayed easing cycle.

Daily Market Moves Summary: Dollar Struggles to Gain Ground as Investors Look for Boost in FOMC Minutes

  • The highlight of the market will be the publication of the Minutes of the Federal Open Market Committee (FOMC) of the last meeting in January at 19:00 GMT, which may fuel volatility in expectations of the next Fed decision.
  • At the moment, CME's FedWatch tool indicates a 20% chance of a rate cut at the next meeting in March and also remains low for May, reflecting that market sentiment is leaning towards the Fed's intention. to maintain rates at restrictive levels.
  • Markets are now pushing the start of interest rate easing to June.

Technical Analysis: DXY bulls remain weak and must reclaim the 100-day SMA

The indicators on the daily chart reflect a balance between buying and selling pressure. The Relative Strength Index (RSI) is in positive territory, but its negative slope suggests that the buying momentum is losing steam. The Moving Average Convergence Divergence (MACD), with its decreasing green bars, implies that any bullish momentum is weakening and could transition into a bearish bias.

Furthermore, the positioning of the index compared to its simple moving averages (SMA) offers an interesting perspective. Despite the bearish pressure, the bulls have managed to keep the DXY above the 20-day and 200-day SMA. This suggests that buyers continue to exert some strength over the longer time horizon.

However, the fact that the DXY is below the 100-day SMA could indicate the existence of intermediate barriers to bullish moves. Therefore, while the broader trend could continue to lean towards buyers, the near-term outlook presents a battle for control between bulls and bears.

Frequently Asked Questions about the Canadian Dollar

What factors determine the price of the Canadian dollar?

The key factors that determine the price of the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of oil, Canada's main export product, the health of its economy, inflation and the trade balance, which is the difference between the value of Canadian exports and its imports. Other factors are market confidence, that is, whether investors bet on riskier assets (risk-on) or look for safe assets (risk-off), with the risk-on being positive for the CAD. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian dollar.

How do Bank of Canada decisions affect the Canadian dollar?

The Bank of Canada (BoC) exerts significant influence over the Canadian Dollar by setting the level of interest rates that banks can lend to each other. This influences the level of interest rates for everyone. The BoC's main objective is to keep inflation between 1% and 3% by adjusting interest rates up or down. Relatively high interest rates are usually positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the CAD and the latter being positive for the CAD.

How does the price of oil affect the Canadian dollar?

The price of oil is a key factor influencing the value of the Canadian Dollar. Oil is Canada's largest export, so the price of oil tends to have an immediate impact on the value of the CAD. Generally, if the price of oil rises, the CAD also rises, as aggregate demand for the currency increases. The opposite occurs if the price of oil falls. Higher oil prices also tend to lead to a higher probability of a positive trade balance, which also supports the CAD.

How does inflation data influence the value of the Canadian Dollar?

Although inflation has traditionally always been considered a negative factor for a currency, as it reduces the value of money, the opposite has actually happened in modern times, with the relaxation of cross-border capital controls. Higher inflation often leads central banks to raise interest rates, attracting more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the local currency, which in the case of Canada is the Canadian Dollar.

How does economic data influence the value of the Canadian dollar?

The published macroeconomic data measures the health of the economy and may have an impact on the Canadian dollar. Indicators such as GDP, manufacturing and services PMIs, employment and consumer confidence surveys can influence the direction of the CAD. A strong economy is good for the Canadian dollar. Not only does it attract more foreign investment, but it may encourage the Bank of Canada to raise interest rates, resulting in a stronger currency. However, if economic data is weak, the CAD is likely to fall.

Source: Fx Street

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