Wednesday’s FOMC statement and press conference have come and gone, and financial markets have continued to react strongly to a very clear verdict. The Fed has become substantially more dovish than in December when it raised interest rates for the first time in over nine years, and also even more dovish than its most recent meeting in late January. Wednesday’s statement and press conference have led market participants to expect that this year’s pace of monetary tightening could essentially be halved from forecasts made in December.
As may have been expected, the market consequences of this statement could most readily be discerned on the US dollar, which plunged against other major currencies on Wednesday shortly after the Fed’s announcement, and continued to fall as of Thursday morning. This has helped prompt USD/CAD to drop down to a major psychological level at 1.3000.
At the same time, crude oil prices have benefited from the weaker US dollar in the past two days and have also been further boosted by tentative confirmation of a meeting set for mid-April among major OPEC and non-OPEC nations to discuss an oil production cap. This surge in the price of crude has reversed losses suffered earlier in the week, and has further boosted the oil-correlated Canadian dollar.
Together, the significantly dovish Fed statement combined with stronger crude oil prices have led to a major breakdown for USD/CAD below both the key 1.3200 support level as well as a major uptrend support line extending all the way back to the mid-2014 lows. As of Thursday morning, the currency pair has settled around the key 1.3000 psychological support level, which is also at an important 61.8% Fibonacci retracement of the recent bullish trend from the May 2015 lows up to January’s 1.4600-area multi-year high.
As such, USD/CAD has reached down to yet another critical support juncture. With any continued downside momentum and sustained trading below this 1.3000 level due to a continued recovery for crude oil and weakness in the US dollar, the next major downside target is at the key 1.2800 support level. Any further drop below 1.2800 could open the way for USD/CAD to target further weakness towards 1.2500.