By Ketki Saxena
Investing.com – The Canadian dollar weakened against its US counterpart today, as the US dollar rallied across the board following hawkish comments from Federal Reserve Chair Jerome Powell as he testified before Congress.
Chairman Powell told the Senate Committee that the US the central bank will likely need to raise interest rates more than previously expected as inflation remains stubbornly high.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated," Powell commented, adding that "If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes”.
Following the comment, the US dollar extended its gains, treasury yields pared back earlier losses, and risk sentiment took a turn for the worse, weighing on equities and commodities - both asset classes to which the Canadian dollar is closely linked.
Tomorrow will be a critical day for the pair, as Mr. Powell continues his testimony, while the Bank of Canada makes a monetary policy announcement. The Bank of Canada is expected to hike hold its policy rate steady tomorrow, whereas the Fed is leaning more hawkish than previously expected.
On a technival level for the pair, analysts at FX Street note, “The USD/CAD has extended its gains past the 130 pips in the day, with bulls eyeing to test the November 3 high, which confluences with an upslope trendline that passes around 1.3808. If the USD/CAD pierces the latter, that wound put into play a test of 2022 high at 1.3977. But first, buyers need to reclaim 1.3900, followed by the latter and the psychological 1.4000 mark.”
“In an alternate scenario, the USD/CAD first support would be the 1.3700 figure for a bearish continuation, followed by the prior’s YTD high at 1.3685. Once cleared, the USD/CAD next support would be March 3, daily low at 1.3550.”
On a fundamental level for the pair, analysts at Scotiabank (TSX:BNS) note that “The CAD looks somewhat undervalued, according to our FV model…. variables are moving in favour of the CAD, if only slightly— which should, along with the USD’s stretched valuation, limit scope for CAD losses (all else equal). An interesting development in our correlation matrix is the now clear decoupling between the CAD and the S&P 500. Spreads are back in focus as a prime driver of the CAD—at least for now.”