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The Loonie weakens following a weaker crude oil price and a less optimistic US -China trade deal resolution.

Isaac Figueroa

The Loonie trades weaker this morning following resurfacing US-China trade tensions, which helped revive the US dollar demand. Furthermore, a modest pull-back in oil prices undermined the Loonie. Despite the prevailing bullish sentiment around crude oil prices, which tend to underpin demand for the Loonie, the Loonie, a commodity-linked currency, is showing signs of weakness. However, all the attention and focus will be later today on the latest FOMC monetary policy update in the US.

Technically speaking, the USD/CAD is trading within a range that started seven days ago on March 13th. The resistances (on the upside) are prices between 1.3340 – 1.3360 and the support area are prices between the 1.3275 and 1.3300 handle. We should expect a breakout from this range after the FOMC’s latest monetary policy declaration at 2:00 pm in the US. It is important to remember that the USD/CAD pair is still trading in an uptrend and at this moment it is trading closer to the lower support, which means that for now, the risk-reward seems to favour market participants who believe that the USD/CAD will increase over the next few days.

The US dollar index is trading flat this morning, after modest gains in the Asian and European session, following news that China is rejecting US demands. Chinese officials said that although they accepted changes in their intellectual property policies, they have not received guarantees from the Trump administration that the tariffs would be lifted. Asian and European equity markets fell because markets had priced a trade-war resolution.

However, the primary driver today is the Fed decision. The US dollar is awaiting the FOMC and its latest monetary policy declaration at 2:00 pm Est, along with updated economic data and forecasts. Market participants are expecting a more dovish tone, and there won’t likely be a chance of any concrete guidance on the balance sheet; Powell and other Fed speakers have made sure to let us know this since January. In a sense, we can imagine Powell repeating that the US economy is doing well, growing solidly without signs of an inflationary pickup, and the Fed will probably decide not to raise rates.

However, if the Fed turns out to be even more dovish than what market participants expect, the US dollar might weaken against the Euro, Loonie, Aussie dollar and Kiwi dollar. Of course, any surprise where market participants start feeling that the Fed knows something that they don’t know could create high volatility in all the US dollar pairs.

The Euro pushed higher on Tuesday on the back of positive German data; the ZEW Indicator of Economic Sentiment for Germany recorded a substantial increase of 9.8 points in March 2019, with the corresponding indicator climbing to a level of minus 3.6 points. Although the indicator is still below the long-term average of 22.2 points, expectations for medium-term economic growth are now less pessimistic than they were a month or two ago.

EUR/USD is trading flat at 1.1354 this morning, with market participants now eyeing the FOMC this afternoon.

The British Pound has fallen this morning as investors foresee a short Brexit extension. According to the WSJ, the UK asked the European Union to delay its departure from the bloc until June 30th, an expansion that if approved would give Theresa May months to break an impasse in Parliament over her withdrawal deal. The leaders of the EU’s other 27 member states are set to discuss the proposed delay at a two-day summit beginning Thursday. However, European officials have said any delay wouldn’t automatically be agreed on this week.

In other news, yesterday UK employment numbers and average earnings printed positively above market expectations, albeit the reaction of the Cable was muted as attentions remain firmly affixed on Brexit developments. The GBP/USD pair is trading at 1.3180 this morning, representing a 0.60 percent fall.

The Australian dollar edged lower through trade on Tuesday, giving up 0.7100 handle. Having edged higher through the last seven days AUD/USD has struggled to extend gains beyond 0.7100 as market movements remain primarily muted. It fell further overnight following comments from RBA Assistant Governor Bullock; she said she had some concerns about the stability of the housing sector, particularly the apartments market in Sydney.

Attentions now turn to the US Federal Reserve Policy Meeting this evening for immediate short-term direction. A string of softer US data sets have supported the Fed’s recent dovish shift, and markets will be keenly attuned to any rhetoric that hints to a significant extension of the current patient platform.

The NZD/USD pair is flat this morning; this on the back of comments by the RBA Assistant Governor – see above. Traders are also perhaps a little wary of NZ GDP data due later tonight as well as the FOMC, which will get most of the attention.