**USD/CAD Struggles Below 1.3800 as Fed Rate Cut Expectations Weigh on Greenback**
*Adapted and expanded from an article by FXStreet’s Akshit Bhatia*
The USD/CAD pair is facing sustained downward pressure as it continues to trade below the 1.3800 mark, weighed down by increasing market bets that the U.S. Federal Reserve may soon begin to ease interest rates. This weakening of the U.S. dollar is further compounded by comparative strength in the Canadian dollar, underpinned by firm oil prices and reinforced by the Bank of Canada’s cautious policy outlook.
At the heart of USD/CAD’s subdued price action lies a confluence of fundamental and technical factors. Relative interest rate expectations, energy price movements, risk sentiment, and broader macroeconomic trends are all playing a part. In this article, we will explore in detail what is driving the exchange rate dynamics between the U.S. dollar and the Canadian dollar, including:
– Factors weighing on the U.S. dollar
– Fundamentals supporting the Canadian dollar
– Key economic releases influencing market sentiment
– Technical outlook for the USD/CAD currency pair
– Near-term forecast and potential risk factors
Let’s break these down.
## 1. U.S. Dollar Weighed by Growing Fed Rate Cut Expectations
Market participants are closely monitoring evolving monetary policy signals from the Federal Reserve. Although the Fed has maintained a somewhat hawkish tone in recent meetings, recent macroeconomic developments have fueled speculation that rate cuts may be closer than previously expected.
According to the CME FedWatch Tool:
– Markets are pricing in a significant probability of a 25-basis-point rate cut by the September 2024 FOMC meeting.
– Probabilities for one or more rate cuts by the end of 2024 have risen to over 60 percent.
– Treasury yields have declined in response, and the U.S. dollar index (DXY) has softened, slipping toward 104.50.
Driving these expectations is a combination of factors:
– U.S. inflation data from April showed moderating price pressures, with Core PCE (the Fed’s preferred inflation gauge) slowing to 2.7 percent annually.
– Several Fed officials, though cautious, have acknowledged room for policy flexibility if inflation continues to ease.
– Weakening consumer sentiment and softer labor market data suggest the possibility of a broader economic slowdown.
As investor expectations tilt toward policy easing, the U.S. dollar has started losing its previously strong yield-based appeal.
## 2. Canadian Dollar Bolstered by Firm Oil Prices and BoC Policy Caution
Unlike the Federal Reserve, the Bank of Canada (BoC) has signaled a more measured approach to rate policy normalization. While the BoC did deliver a 25-basis-point cut at its June 2024 meeting, it stressed that future cuts would be data-dependent and gradual. This forward guidance, interpreted as relatively hawkish when compared with market expectations, has helped cushion the Canadian dollar.
Other factors supporting CAD strength include:
– Crude oil prices have remained relatively robust, with WTI crude holding above $80 per barrel. Since oil is Canada’s key export, higher prices typically support CAD.
– Canada’s April inflation data (CPI YoY) showed continued easing but not to the degree that would warrant aggressive monetary easing.
– Canadian job market data for May showed stronger-than-expected employment gains, reinforcing the view that the BoC can afford a wait-and-see approach.
With the potential divergence in central bank policy trajectories between the BoC and the Fed, the Canadian dollar appears supported near recent highs against the U.S. dollar.
## 3. Key Economic Data Releases Shaping Market Sentiment
Both the U.S. and Canadian economic calendars have offered significant catalysts for USD/CAD price action in recent weeks. Here are some highlights:
### United States
– May Non-Farm Payrolls (NFP): While job gains remained solid, wage
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