USDCAD is showing signs of a pullback on its 1-hour time frame, as the pair bounced off the 1.2200 major psychological support area.

Price is now testing resistance at the 38.2% Fibonacci retracement level, which lines up with the short-term 100 SMA.

A higher pullback might last until the 50% Fib, which coincides with the broken support at the 1.2400 major psychological level. This also lines up with the longer-term 200 SMA. At the moment, the short-term SMA below the long-term SMA confirms that the downtrend could carry on.

Stochastic is moving up, suggesting that a higher correction is possible. Further gains past 1.2400 could find a ceiling at the 1.2450 minor psychological level, which is near the highest Fib level. RSI is already indicating overbought conditions, which means that sellers are ready to push price back down to the previous lows.

Event risks for this setup include the FOMC statement at the middle of the week, as this should set the tone for longer-term dollar price action. Recent reports from the US have shown a pickup, underscoring the Fed’s view that the slowdown was just temporary. Traders are also bracing for a hawkish statement during which the Fed might give a time line on their tightening moves.

Of course Fed head Yellen might also decide to downplay their hawkishness and say that there are still plenty of challenges facing the US economy. She could remind traders that the US dollar’s strength could wind up negative for inflation and overall growth. In this case, the US dollar could still lose ground against its forex counterparts.

There are no major reports lined up from Canada, except for its CPI figures much later on. Data from Canada has also shown a bit of a pickup, allowing the BOC to say that they’re not looking to cut interest rates again soon.

By Kate Curtis from Trader’s Way