**USD/CAD Under Pressure: Fed and BoC Rate Cut Expectations, Bearish Head-and-Shoulders Signal a Market Turning Point**
*Adapted and expanded from the original article by Pablo Piovano on FXStreet*
The USD/CAD currency pair is showing signs of vulnerability amid evolving monetary policy stances by both the Federal Reserve (Fed) and the Bank of Canada (BoC). The combination of rate cut expectations and a bearish chart pattern suggests that the pair may be on the verge of a more sustained downward trend. Analysts are paying close attention to both fundamental developments and technical indicators that suggest the market could be entering a key transition phase.
This in-depth analysis explores the fundamental drivers behind the current USD/CAD dynamics, including central bank policy outlooks, recent economic data releases, commodity market influences, and technical chart analysis. We also consider broader global market trends that could continue influencing the pair heading into the second half of 2024.
## Fed and BoC Diverging Outlooks: A Fundamental Assessment
Both the Federal Reserve and the Bank of Canada are navigating through persistent inflationary pressures while attempting to support their respective economies. However, emerging differences in their policy paths are stirring volatility in the USD/CAD exchange rate.
### Recent Developments in U.S. Monetary Policy
– The June Federal Open Market Committee (FOMC) meeting revealed that while inflation in the U.S. has moderated compared to 2022 highs, it remains above the Fed’s 2 percent target.
– Fed Chair Jerome Powell emphasized a data-dependent approach, but indicated a willingness to consider rate cuts if disinflation continues.
– The most recent dot plot from the Fed suggested only one rate cut for the remainder of 2024, down from three cuts projected earlier in the year.
– Still, futures markets are pricing in the probability of at least 25–50 basis points of easing before 2025, reflecting investor skepticism about the Fed’s restrictive stance.
### Canadian Central Bank Takes the First Step
– In contrast, the Bank of Canada surprised the market on June 5 by becoming the first G7 central bank to cut interest rates, lowering its benchmark rate by 25 basis points to 4.75 percent.
– BoC Governor Tiff Macklem stated that persistent easing in inflation justified the move and left open the door for further cuts in 2024.
– Canada’s annual CPI growth slowed to 2.7 percent in April, moving closer to the BoC’s target range of 1–3 percent, giving the bank more flexibility to act.
– Financial markets now expect another rate cut from the BoC by September, increasing pressure on the Canadian dollar.
### Implications for USD/CAD
Typically, when the BoC cuts interest rates ahead of the Fed, the Canadian dollar weakens against the U.S. dollar. However, the reaction in USD/CAD has been more nuanced, likely due to:
– Growing expectations for the Fed to eventually follow with its own rate cuts.
– Stabilization in oil prices, which tends to support the Canadian dollar as Canada is a major crude exporter.
– A lack of upside momentum in USD/CAD despite favorable rate differentials for the USD.
## Technical Analysis: Bearish Head-and-Shoulders Pattern Emerges
From a technical perspective, the USD/CAD pair has formed a classic bearish head-and-shoulders (H&S) pattern, which generally signals a potential trend reversal from bullish to bearish.
### Key Features of the Pattern
– **Left Shoulder:** Formed near 1.3600 earlier in the year.
– **Head:** Peaked slightly above 1.3800 around mid-April 2024.
– **Right Shoulder:** Formed in May and early June, again near the 1.3660–1.3670 range.
– **Neckline:** Currently lies in the range of 1.3600–1.3620, a level the pair
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