US Dollar Poised to Gain Ground Against Canadian Cousin

USD/CAD TRADING Strategy: Long at 1.2698

• Break of key resistance hints at US Dollar trend reversal vs Canadian cousin
• USD recovery driven by hawkish turn in Fed policy bets, defensive BOC tone
• Long position activated, initially looking for test of a chart barrier below 1.29

A newly assertive US Dollar has broken through the bounds of a down trend defining price action against its Canadian counterpart since May, hinting at further gains ahead.

The greenback marked a bottom in late January amid speculation that the Fed is gearing up for a steeper rate hike cycle than expected. That was triggered by an unexpected surge in wage growth, which popped to a nine-year high. Underwhelming US CPI data briefly undermined follow-through but the release of minutes from last month’s FOMC policy meeting revived momentum, producing what looks to be a breakout.

On the other side of the equation, rhetoric out of the Bank of Canada has turned decidedly more timid. At last month’s policy meeting, Governor Stephen Poloz and company raised the benchmark lending rate but warned that stimulus was still needed, pouring cold water on expectations that a robust tightening cycle is ahead. An expectedly deep downtick in headline inflation has underscored the point.

A long USD/CAD position has been activated at 1.2698, initially aiming for a move higher to test long-standing resistance at 1.2896. A stop-loss will be triggered on a daily close below the 1.26 figure.

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— Written by Ilya Spivak, Currency Strategist for DailyFX.com

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