Watch To See if the Fed Will Scale Back Sooner

The Fed's first interest rate meeting this year was held on Tuesday, and the results of the two-day meeting will be announced on Wednesday. The market is concerned about how the Federal Reserve will respond to the question and outlook of the persistently high inflation in the United States. Therefore, investors will explore the Fed‘s roadmap of interest rate hikes and evaluate the pace and magnitude of interest rate hikes for this year. The market believes that the January Fed meeting will keep interest rates unchanged and maintain the reduction of the Fed’s bond-purchase plan announced last month. However, suppose the Fed accelerates the scale of its tightening cycle. It will mean a faster approach to this years interest rate hiking cycle to suppress the persistently high inflation in the United States.

The Canadian dollar's rally is expected to continue

In the past week, the dollar recovered to 95.6 from 94.6 in response to comments from several Fed officials and some financial institutions on the pace and magnitude of interest rate hikes. In addition, the U.S.'s January manufacturing and service sector PMIs preliminary readings and the Conference Board's consumer confidence index, combined with the new home sales announced on Wednesday before the Fed's interest rate meeting, showed strong growth. As a result, they could increase the urgency for the Fed to tighten monetary policy.

In addition, social expectations may push the dollar higher. After the Fed's meeting on interest rates, the United States released the fourth-quarter GDP, PCE price index, initial jobless claims and the January University of Michigan consumer confidence index. The above economic data will also affect the market's assessment of the pace of monetary policy tightening at the next Fed rate meeting. Technically, after the dollar continued rising for a week, pay attention to the 10-day MA at 95.42 as short-term support. If the dollar index remains above this support level, it will continue to 96.27 and 96.56. If it breaks support, expect it to fall to 94.88 or 94.58.

Wednesday will also mark the announcement of the Bank of Canada's interest rate meeting results. It is generally believed that the Bank of Canada will maintain the interest rate level at 0.25% in response to the continued high inflation in Canada and the easing of housing prices, among other issues. But whether the central bank will take on a hawkish tone on the economic outlook and pave the way for rate hikes to begin at its next meeting. Suppose the tone of this interest rate meeting is hawkish. In that case, the Canadian dollar's rise is expected to continue, and the target of the US dollar against the Canadian dollar is 1.23 or 1.22. Conversely, if the USD/CAD keeps rising, the target is the 1.28 or 1.29 level.