USDCAD retreats from 1.39 following a renewed challenge to Fed autonomy. What lies ahead?

Market Fundamentals Overview

US Dollar (USD):

The US Dollar experienced broad weakness today after the US Department of Justice issued a subpoena to the Federal Reserve. This rare action has intensified the ongoing dispute between President Trump and Fed Chair Powell regarding the pace of interest rate reductions.

Officially, the investigation centers on whether Powell misrepresented details about the Federal Reserve headquarters renovation—specifically its scale, expenses, and luxury elements—when speaking to the Senate Banking Committee.

However, it is widely perceived that the probe serves as a political maneuver to pressure Powell into accelerating rate cuts. A similar tactic was observed last year when President Trump unsuccessfully attempted to dismiss Fed Governor Cook, a case still awaiting a Supreme Court ruling.

The dollar declined on concerns that undermining the Fed’s independence could heighten inflation risks and erode the currency’s value. Despite these worries, the likelihood of the Fed losing its autonomy remains minimal, given the significant repercussions such a move would have both domestically and globally.

Looking ahead, the US Consumer Price Index (CPI) report is due tomorrow and could significantly influence market sentiment. A higher-than-expected reading may prompt markets to anticipate a more aggressive rate stance, lending support to the dollar. Conversely, weaker data could reinforce expectations for at least two rate cuts by year-end, putting further pressure on the greenback. The overall outlook for the USD is neutral to bearish.

Canadian Dollar (CAD):

Turning to the Canadian Dollar, Friday’s employment report did little to alter the Bank of Canada’s (BoC) policy stance. While job gains surpassed forecasts, wage growth slowed and the unemployment rate ticked higher, though this was accompanied by a rise in labor force participation. Overall, the data was solid but not enough to shift the BoC’s cautious approach.

At its most recent meeting, the BoC kept rates unchanged and refrained from endorsing market expectations for further hikes. The central bank maintained a guarded outlook, citing persistent weaknesses in recent GDP and employment figures, despite some improvements.

The latest inflation data showed the Trimmed Mean year-over-year rate easing to 2.8%, slightly below both consensus and the previous month’s reading. This prompted a modestly dovish adjustment in rate expectations, with markets now pricing in a total of 11 basis points of tightening by year-end. The CAD’s outlook remains neutral to bullish.

USDCAD Technical Analysis

Daily Chart

On the daily timeframe, USDCAD recently surged toward the 1.39 level before retreating in response to the DOJ developments. Sellers have entered the market at this resistance, aiming for a pullback toward 1.38. Buyers may find more favorable opportunities near the 1.38 support, with potential upside targeting the 1.41 area.

4-Hour Chart

The 4-hour chart reveals a prevailing upward trendline supporting bullish momentum. Buyers are likely to defend this trendline, managing risk below it while seeking new highs. Conversely, sellers will be watching for a break beneath the trendline to increase bearish positions, with 1.38 as the next key support.

1-Hour Chart

On the 1-hour timeframe, a minor downward trendline is guiding the current pullback toward the major trendline. Buyers may look for entries near the major trendline, especially if price breaks above the minor counter-trendline, which could signal renewed bullish momentum. Sellers, meanwhile, are likely to continue pressing lower along the minor trendline, aiming for a decisive break below the major support. The red lines on the chart indicate the average daily range for today.

Key Events Ahead

• Tomorrow: Release of the US CPI report.
• Wednesday: November US Retail Sales and Producer Price Index (PPI) data, as well as a possible Supreme Court decision regarding Trump’s tariffs.
• Thursday: Latest US Jobless Claims figures.