**Canadian Dollar Outlook: USD/CAD Gains Momentum Following Central Bank Decisions**
*Originally reported by Matt Weller, FOREX.com; additional research included from multiple financial sources.*
The Canadian dollar (CAD) has recently come under pressure as the USD/CAD currency pair experienced renewed buying interest, signaling a shift in trader sentiment. This shift comes in the wake of recent monetary policy decisions from the Bank of Canada (BoC) and the U.S. Federal Reserve, which have had diverging tones and implications for interest rate expectations. This divergence has caused a rebalancing in expectations among traders, propelling USD/CAD higher despite broader macroeconomic crosswinds.
As global currency traders digest these key central bank moves, it’s becoming increasingly evident that the BoC is tilting toward a potential rate-cutting cycle, while the Fed remains more cautious and possibly more hawkish in its stance. This fundamental divergence could have significant implications for the Canadian dollar’s performance in the weeks and months ahead.
This article provides an in-depth look at the latest CAD developments, examining the policy announcements, market reactions, technical chart patterns, and what traders can expect moving forward.
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## Recent BoC and Fed Actions Shift Market Tone
Last week delivered substantial monetary policy updates from two major central banks — the Bank of Canada and the U.S. Federal Reserve. Each institution’s position triggered critical movements in the USD/CAD exchange rate.
### Bank of Canada: First G7 Central Bank to Cut Rates
On June 5, 2024, the Bank of Canada became the first G7 central bank to begin an interest rate easing cycle. The BoC lowered its key overnight rate by 25 basis points, moving from 5.00 percent to 4.75 percent.
Key points from the BoC decision:
– BoC cited easing inflation pressures as a key rationale, with core inflation showing signs of deceleration.
– While overall inflation remains above the bank’s 2 percent target, momentum is cooling, especially in consumer price and wage data.
– BoC Governor Tiff Macklem signaled a more dovish tone, stating that further rate cuts could be warranted if inflation continues to decline sustainably.
– The bank will closely monitor inflation expectations, wage growth, and housing market indicators in future decisions.
This pivot toward looser monetary policy marked a significant development for the Canadian dollar, which immediately weakened in response.
The BoC’s policy shift was notable, not just for its content but for its symbolism. Markets interpreted the cut as a green light for further easing, especially if economic data continues to soften. As a result, the Canadian dollar sold off sharply following the announcement, with traders increasing bets on additional rate cuts in 2024.
### U.S. Federal Reserve: Holding Rates, Leaning Hawkish
The narrative from the Federal Reserve, released the same week, stood in sharp contrast. The Fed chose to leave its benchmark federal funds rate unchanged at 5.25 to 5.50 percent, keeping its tightening stance intact for now.
Key highlights from the Fed’s announcement:
– The Fed’s updated dot plot showed a reduction in projected rate cuts for 2024, with only one 25-basis-point cut now anticipated by year-end, down from three in March.
– While headline inflation has decelerated, underlying inflation remains sticky, particularly in services and housing.
– Fed Chair Jerome Powell noted uncertainty in the inflation and labor market trajectory, but emphasized the need for more concrete disinflation progress before considering easing.
The more hawkish tone contrasted sharply with the BoC’s move, creating a notable policy divergence that directly affected the USD/CAD pair.
Currencies are often driven by relative interest rate expectations. With Canada now beginning a cutting cycle and the Federal Reserve still on hold, traders are increasingly favoring the U.S. dollar over the Canadian dollar.
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## Market Reaction: USD/CAD Breaks Out
Following both central bank announcements, USD/CAD saw a strong technical
Read more on USD/CAD trading.