USD/CAD, Gold Forecast: Two trades to watch

USD/CAD rises ahead of BoC rate decision

USD/CAD is rising ahead of the BoC rate decision later today and amid more hawkish expectations surrounding the Federal Reserve.

The BoC is widely expected to leave interest rates unchanged at 2.25% at today's September meeting, as the central bank finds itself between a rock and a hard place. Escalating trade tensions threaten to slow economic growth, whilst inflationary pressures weigh against any easing.

July CPI rose 3% year-over-year, up from 2.8% in June, remaining within the BoC's 1%-3% target range. This gives the BoC little reason to consider a cut, particularly as oil prices continue to rise and recent GDP data showed the economy was growing at a faster pace than the central bank had forecast.

Canada's manufacturing sector expanded for a fifth straight month in August, as output and employment increased. However, the outlook is deteriorating as trade tensions cast doubt on whether this growth can be sustained.

While the BoC is expected to leave rates unchanged, the market is increasingly expecting the Federal Reserve to hike rates in September.

After a hawkish stance from Federal Reserve Chair Kevin Warsh at Friday's Jackson Hole Symposium speech, the market now sees a 70% probability that the Fed will hike rates this month by 25 basis points.

Furthermore, the U.S. dollar is gaining on safe-haven demand and rising Treasury yields.

The market will be watching the ADP payrolls report later today, ahead of Friday's crucial nonfarm payroll report, which should provide further clues over whether the Fed will hike rates.

USD/CAD forecast – technical analysis

USD/CAD recovered from support at 1.3730, rising above the 200 EMA and is testing resistance around the falling trend line, the 50 EMA and horizontal resistance around the 1.3950 level.

Should momentum continue to build, buyers will look to break above this key resistance zone and 1.4000 to extend gains towards 1.4080, the late-July high.

On the downside, immediate support is at the 200 EMA around 1.3900. A break below here could see sellers gain traction towards 1.3730. Sellers need to take out this level to create a lower low and extend the bearish move.

Gold falls to a 3-week low as yields rise

Gold has fallen to its lowest level in three weeks amid escalating conflict in the Middle East, which has lifted oil prices, raising inflationary concerns and increasing rate hike expectations.

Gold is on track for a fourth straight day of declines and is testing key support.

Tensions in the Middle East have re-escalated, with the most significant exchange of fire in weeks. As a result, oil prices are rising, with Brent above $95 a barrel, lifting inflationary concerns and pushing Treasury yields higher.

Whilst gold is often seen as a hedge against inflation, higher interest rate expectations and Treasury yields dampen its appeal. Furthermore, the stronger U.S. dollar adds to the bearish bias for U.S.-denominated gold.

The market is currently placing a 70% chance that the Fed will hike rates this month, up from 35% last week following a more hawkish stance from Federal Reserve Chair Kevin Warsh.

The market is now awaiting the ADP employment report due later today, ahead of the more crucial nonfarm payroll report on Friday.

Softer labour market data could ease pressure on gold. However, stronger numbers or more hawkish Fed comments could see the precious metal fall further.

Gold forecast – technical analysis

 

Gold broke out from the symmetrical triangle pattern, ran into resistance just below 4,700 and reversed lower. The price is testing support at 4,315.50 and the 200 EMA, as well as the 23.6% Fibonacci retracement of the 5,598 high and the 3,940 low.

Sellers, supported by the RSI below 50, will look to break below this key support level at 4,325. Below here, sellers could gain traction towards 4,200 and 4,100, the March low. A break below 3,940 would create a lower low.

Should support hold, buyers will look towards 4,500 and 4,570 on the upside. The 38.2% Fibonacci retracement arises around 4,700, creating a higher high and bringing 4,770 into focus. Above here, the 50% Fibonacci retracement comes in ahead of 4,965, while the 61.8% Fibonacci retracement and 5,000 round number provide further resistance.