USDCAD is declining amid Fed's monetary policy shift

The USDCAD currency pair is plummeting on Wednesday as the Federal Reserve's (Fed) dovish rhetoric reduces investors' interest in the U.S. dollar.

The dollar index is trading near the five-month low that it hit last week. According to Reuters, it will fall by another 1.9% in 2023 after two years of growth due to the Fed's rate hikes aimed at curbing inflation.

The recent weakening of the dollar is driven by expectations of monetary policy easing by the U.S. central bank next year, as noted by Reuters. According to CME FedWatch data, the likelihood of rate cuts in March 2024 is 79%.

According to Monex USA analysts, liquidity across the world will remain quite thin this week as many organizations are closed due to the holidays. This may lead to some instability in markets, but the week is generally expected to be rather quiet.

Meanwhile, for the first seven months of the 2023/24 fiscal year, Canada recorded a budget deficit of 15.13 billion Canadian dollars (about $11.44 billion). This was due to government expenditures increasing faster than revenues as reported by the Canadian Ministry of Finance on Friday.

For the same period last year, Canada posted a budget surplus of 174 million Canadian dollars (about $132 million).

Since the beginning of 2023, Canada's revenues have increased by 1.2%. This growth is mostly driven by higher interest income and other sources of non-tax revenues, according to a report from the Ministry of Finance. The increase in the budget deficit may put pressure on the Canadian dollar after resumption of active trading in financial markets.

USDCAD quotes are forming a downtrend on the H4 timeframe.

In terms of wave analysis, the price is forming the fifth descending wave. Relative Strength Index (RSI) (standard values) shows that the pair is oversold. As the price approaches the semi-annual support at 1.3120, its value may correct.

Signal:

The short-term outlook for the USDCAD pair suggests buying near the level of 1.3120. 

The target is at the level of 1.3400.

Part of the profit should be taken near the level of 1.3270.

A stop-loss could be set at the level of 1.2980.

The bullish trend is short-term, so trade volume should not exceed 2% of your balance.