Title: USD/CAD Surges Beyond 1.3750 Mark Amid Fed Rate Cut Speculation and Oil Price Pressure
Author: Based on original reporting by Futunn News, with additional information sourced from FXStreet, Reuters, and other financial news outlets.
The US Dollar to Canadian Dollar (USD/CAD) currency pair has recently pushed through the 1.3750 resistance level, marking a critical move in the forex market. This upward momentum has been driven largely by speculation about the Federal Reserve’s next interest rate moves and downward pressures on crude oil prices, both of which overweight the Canadian Dollar’s performance.
This article provides an in-depth look at the underlying causes of USD/CAD’s breakout, recent economic releases impacting the pair, market expectations regarding central bank policies, and potential future scenarios for traders watching this major currency cross.
Overview of Recent Price Action
– The USD/CAD currency pair surpassed the 1.3750 barrier in recent sessions, signaling renewed demand for the US Dollar over its Canadian counterpart.
– The pair’s upward trajectory was partly paused near 1.3770 before encountering new resistance levels.
– Overall, the trend remains bullish as market sentiment continues to support USD strength due to a cautious Federal Reserve and weak oil market signals.
Fundamental Drivers of the Breakout
Fed Rate Cut Expectations
– Market participants had previously priced in two or more rate cuts from the US Federal Reserve in 2024.
– However, recent economic data, including hotter-than-expected inflation figures and resilient labor market numbers, have cast doubt over the timing and extent of these cuts.
– The latest guidance from the Federal Reserve suggests a more patient, data-dependent approach, reducing immediate pressure on the US Dollar.
– The CME FedWatch Tool indicates a less than 50% probability of a rate cut in June 2024, with July or September now more likely.
Economic Data Supporting the USD
– US Non-Farm Payrolls for May showed continued strength, with nearly 275,000 jobs added versus economists’ projections of just 185,000.
– The unemployment rate remained at a multi-decade low of 3.9%, accompanied by solid wage growth.
– Core Personal Consumption Expenditure (PCE), the Fed’s preferred inflation measure, rose 2.8% year-on-year in April, remaining significantly above the Fed’s 2% target.
Impact of Oil Prices on CAD
– As Canada is a major oil exporter, its economy and currency are heavily influenced by crude oil prices.
– West Texas Intermediate (WTI) oil recently dropped below $74 per barrel due to subdued demand forecasts from both OPEC and the International Energy Agency (IEA).
– A widening supply-demand imbalance has pressured prices, leading to reduced investor confidence in commodity-linked currencies like the Canadian Dollar.
– This has added to USD/CAD’s upward momentum, especially as oil’s significance to Canada’s GDP and trade surplus remains strong.
Bank of Canada’s Diverging Policy
– Adding to the directional disparity, the Bank of Canada (BoC) began its rate-cutting cycle in early June, slashing its benchmark interest rate by 25 basis points to 4.75%.
– BoC Governor Tiff Macklem cited easing inflation and signs of economic sluggishness as reasons for initiating monetary policy easing.
– Canada’s April inflation rate came in at 2.7%, gradually descending toward the BoC’s 2% target, which justified the loosening of monetary conditions.
– With the US Fed holding firm and the BoC easing, the interest rate differential now favors the US Dollar, attracting yield-seeking flows and raising USD/CAD’s exchange rate.
Technical Analysis of USD/CAD
– After breaking through the 1.3750 resistance level, USD/CAD now targets the next psychological marker near 1.3800.
– Momentum indicators such as the Relative Strength Index (RSI) show an overbought reading on the 4-hour and daily time
Read more on USD/CAD trading.