Yesterday, the Bank of Canada reduced its key interest rate by 25 basis points to 4.25%. Its governor, Tiff Macklem, cited weak economic growth and suggested that a more substantial rate cut could be considered in the future.

While the rate cut was widely expected, the currency market reacted with a surge in volatility. For instance, on the USD/CAD chart:
→ On 3 September, ahead of the decision, the USD/CAD rate was climbing;
→ On 4 September, immediately after the announcement, the rate dropped sharply.

What could be the outlook for the exchange rate, which has fallen by approximately 3% from early August to the end of the month, breaking key resistance at 1.3600?

A technical analysis of the USD/CAD chart shows that the rate is best described by a downward red channel. The median line of this channel acted as resistance (shown by an arrow) earlier this week, pushing the rate towards the trendline (in blue), which had supported the rise from the lower boundary of the red channel. This support is further reinforced by the 1.3500 level.

It is therefore reasonable to assume that the market is reaching a temporary balance between buyers and sellers, leading to fluctuations in the USD/CAD rate between the red median line and the 1.3500 level. However, traders should remain cautious of a potential resurgence in bearish pressure, which dominated throughout August, as the 1.3500 level could again act as resistance.

Read analytical USD/CAD price forecasts for 2024 and beyond.

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