**USD/CAD Edges Lower Toward 1.3750 as Market Bets Heat Up on Fed and BoC Rate Cuts**
*Adapted and expanded from an article by Thomas Westwater, FXDailyReport*
The USD/CAD currency pair has drifted lower amid shifting monetary policy expectations from both the U.S. Federal Reserve and the Bank of Canada (BoC). Investor sentiment is increasingly leaning toward future interest rate cuts from both central banks, which is putting pressure on the U.S. dollar and affecting related currency pairs such as USD/CAD.
Traders have begun pricing in a more dovish outlook for North American central banks due to a variety of macroeconomic data points, inflation trajectories, and comments from central bank officials. Against this backdrop, the USD/CAD pair has slipped to around the 1.3750 level, near its lowest levels in weeks, as investors reassess their expectations on where interest rates are heading.
This article explores the macroeconomic context behind the USD/CAD’s slide, examining developments from both Canada and the U.S., forward-looking expectations for the Fed and BoC, technical patterns in the forex market, and the potential paths the pair might take over the coming weeks.
## USD/CAD: Recent Price Action
– The USD/CAD currency pair began sliding last week and continued its downward trajectory into this week, settling near 1.3750.
– This level represents a key price zone that traders are watching closely due to historic support and resistance levels.
– The Canadian dollar, often seen as a commodity-linked currency due to Canada’s export-heavy economy, is responding positively to stabilization in crude oil prices.
– Meanwhile, weakness in the U.S. dollar has added further downside pressure on USD/CAD.
## Drivers Behind the USD/CAD Decline
### 1. Expectations for Federal Reserve Rate Cuts
The U.S. economy has shown signs of slowing, and recent data releases, particularly related to inflation and labor markets, suggest that the Federal Reserve may pivot towards an easing cycle later in 2024.
– **CPI and PPI Reports:** April’s Consumer Price Index (CPI) softened slightly to 3.4% year-on-year, down from March’s 3.5%. Core inflation cooled moderately, reinforcing the narrative that the disinflation trend remains intact.
– **Job Market Indicators:** The U.S. job market is showing early signs of cooling. While the headline unemployment rate remains relatively low at 4.0%, the pace of job creation has slowed, and initial jobless claims have begun to rise.
– **Fed Funds Futures Outlook:**
– CME FedWatch Tool shows an increasing probability of a rate cut by September 2024.
– Over 65% of traders are now pricing in at least one rate cut by the end of the year.
– **FOMC Commentary:** Several U.S. Federal Reserve officials have communicated a willingness to ease policy if inflation data continues its easing trend. Notably, Fed Governor Christopher Waller recently acknowledged that inflation is moving in the right direction but emphasized the need for more consistent data before taking action.
### 2. Bank of Canada’s Dovish Turn
The Bank of Canada became one of the first G7 central banks to initiate a rate-cutting cycle, trimming its overnight interest rate by 25 basis points to 4.75% in June.
– **Why the BoC Cut Rates:**
– Headline inflation in Canada has eased close to the central bank’s 2% target; the April CPI report showed inflation at 2.7%.
– Economic growth remains constrained, with GDP growth slowing and consumer spending subdued.
– Core inflation metrics also cooled, strengthening the case for monetary easing.
– **Outlook for Future Cuts:**
– Analysts expect at least one or two more 25-basis-point cuts before the end of 2024 if inflation continues to stabilize and economic conditions remain
Read more on USD/CAD trading.