**USD/CAD Holds Steady Near 1.3750 Amid Rising Inflation Risks and Fed Policy Uncertainty**
Original source: FXStreet, Article by FXStreet News Team
Additional insights sourced from Bloomberg, Reuters, and the Bank of Canada
The USD/CAD currency pair has found stable footing around the 1.3750 level, with market participants assessing a complex blend of macroeconomic indicators, monetary policy uncertainty, and geopolitical developments. The pair’s resilience stems from rising U.S. inflation concerns, ambiguity over the Federal Reserve’s rate path, and relatively steady Canadian economic data. This environment has resulted in guarded optimism for the U.S. dollar while keeping the Canadian dollar in a reactive mode.
This article expands on the key drivers behind USD/CAD’s recent trajectory, exploring the following:
– U.S. inflation expectations and the Federal Reserve’s monetary policy outlook
– Canadian economic outlook and Bank of Canada (BoC) policy stance
– Crude oil price dynamics and their implications for the loonie
– Technical analysis and near-term forecasts for the USD/CAD pair
## U.S. Inflation Concerns Keep USD Supported
The primary factor supporting the U.S. dollar across currency markets is rising inflationary pressures in the U.S. economy. Despite rate hikes over the past 18 months, inflation remains stubbornly above the Federal Reserve’s 2 percent target.
Key developments supporting this narrative:
– The Core Personal Consumption Expenditures (PCE) Index, the Fed’s preferred inflation gauge, showed a month-on-month increase of 0.3 percent in April 2024, consistent with March’s reading.
– Year-on-year, Core PCE climbed by 2.8 percent, indicating persistent underlying inflation.
– According to Bloomberg, services sector inflation continues to drive core prices higher, particularly in areas like housing and medical care.
This persistent inflation complicates Federal Reserve policy. While Fed Chair Jerome Powell has indicated that the central bank will remain data-dependent, markets had earlier priced in two to three rate cuts in 2024. Recent inflation data has led to a reevaluation of that view.
Fed officials have signaled a reluctance to ease prematurely:
– Loretta Mester, President of the Cleveland Fed: “We need more evidence that inflation is sustainably moving back to 2 percent before reducing rates.”
– Neel Kashkari, President of the Minneapolis Fed, has floated the possibility of only one rate cut or even keeping rates steady through the year if inflation doesn’t cool further.
These hawkish tones from various Fed members have bolstered U.S. Treasury yields, with the 10-year yield holding above 4.45 percent as of early June 2024. The rising yields have in turn supported the U.S. dollar broadly, with the DXY (Dollar Index) finding a floor near 104.00.
## Canadian Dollar Faces Mixed Domestic Indicators
While U.S. economic data has largely strengthened the greenback, Canada’s economic signals have been more nuanced. The Canadian dollar, widely viewed as a commodity-linked and cyclical currency, has faced headwinds even as Canada’s data remains relatively stable.
Recent indicators from Canada include:
– Gross Domestic Product (GDP) for Q1 2024 rose slightly above expectations at 1.7 percent annualized, suggesting the economy is still expanding, though at a modest pace.
– National inflation, measured by the Consumer Price Index (CPI), came in at 2.7 percent year-on-year for April 2024, closer to the BoC’s target but still above it.
– The labor market remains resilient. The Canadian unemployment rate held steady at 6.1 percent according to Statistics Canada, highlighting continued strength in hiring seen across service and manufacturing sectors.
Despite this relatively stable macro backdrop, the Canadian dollar has been undermined by dovish signals from the Bank of Canada:
– The Bank of Canada is poised to cut interest rates before the Federal Reserve, with several economists—including
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