Title: USD/CAD Outlook: Bulls Maintain Momentum Near 1.3880, Highest Level Since May
By: FXStreet (original article by Harshita Tyagi)
The USD/CAD currency pair extended its upward trajectory on Tuesday, reaching levels around 1.3880, marking its strongest performance since May 21. This upward momentum reflects the continued strength of the US dollar and renewed selling pressure on the Canadian dollar, underpinned by divergent monetary policy dynamics, global risk sentiment, and commodity market fluctuations.
This article provides an in-depth analysis of the primary drivers behind the USD/CAD rally, evaluates recent economic data from both countries, and outlines potential scenarios for future price movement.
Key Highlights:
– USD/CAD surged to 1.3880, the highest since late May 2024.
– Hawkish Fed outlook and strong US economic data boost the US dollar.
– Falling crude oil prices weaken the Canadian dollar.
– Market participants await further US economic indicators, including GDP and PCE data, for direction.
Current Market Context
The USD/CAD pair has been steadily gaining ground, propelled by a combination of strong demand for the greenback and disappointing data on the Canadian side. Over recent days, bullish bias has remained intact, with the pair climbing over 250 pips since mid-August, underlining growing investor confidence in the US economy compared to its northern neighbor.
Latest Price Action
As of the latest updates from FXStreet, USD/CAD is trading firmly around the 1.3880 mark. This level represents a significant technical resistance zone and may dictate price action in the short term if not convincingly breached.
– The pair opened Tuesday on a strong note, holding its gains in early European trading hours.
– Intraday bias remains bullish, with technical indicators continuing to reflect upward momentum.
Drivers of USD Strength
1. Hawkish Federal Reserve Outlook
– Recent commentary from Federal Reserve officials reinforces expectations of a tighter monetary policy stance.
– The last FOMC meeting minutes showed that several Fed members support holding rates higher for longer to rein in persistent inflation.
– The market is pricing in fewer rate cuts in 2024 than earlier forecasted. As of now, CME’s FedWatch Tool indicates a lower probability of any rate cuts before the end of the year.
2. Robust US Economic Data
– The US economy has demonstrated resilience in the face of tighter credit conditions.
– Key economic indicators for August and early September have surprised to the upside:
– Retail Sales: Rose 0.7% in August vs. 0.4% expected.
– Services PMI: Recorded at 54.5, indicating robust expansion.
– Nonfarm Payrolls: Added 187,000 jobs in August, beating forecasts.
– Inflation: The Core PCE Price Index rose 0.2% in July, aligning with expectations and providing the Fed with room to stay the course on rates.
3. Safe-Haven Demand
– Elevated geopolitical risks, including tensions in Eastern Europe and the Middle East, have strengthened demand for safe-haven assets like the US dollar.
– Equities have underperformed slightly amid renewed volatility, which has driven further inflows into the bond market, subsequently supporting USD.
Weakness in the Canadian Dollar
1. Falling Crude Oil Prices
– As Canada is a leading global oil exporter, fluctuations in crude oil prices directly impact the Canadian dollar.
– Over the past week, WTI crude futures have dipped below $80 per barrel due to:
– Concerns over sluggish demand from China.
– Increased output from non-OPEC countries such as the US and Brazil.
– A stronger US dollar, which makes dollar-denominated commodities more expensive.
2. Dovish Bank of Canada (BoC)
– The BoC decided to keep its benchmark interest rate unchanged at 5.0% during its most recent policy meeting.
– Governor Tiff Macklem indicated that the central bank is
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