**USD/CAD Weekly Forecast: Loonie Awaits Next Catalyst as Market Cools After May’s Frenzy**
*Adapted from the article by Christian Borjon Valencia, Mitrade.com*
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### Overview
The USD/CAD pair demonstrated a marked cooling in volatility after a turbulent May. With major risk events now in the rearview, both the US dollar and the Canadian dollar are waiting for new catalysts to determine their next significant moves. The pair closed the previous week on a weaker note amid shifting market sentiment and economic data releases from both sides of the border.
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### Recent Dynamics: Recap of May’s Movement
– **May’s Volatility**: The USD/CAD currency pair experienced heightened volatility in May, primarily driven by central bank decisions and critical macroeconomic data. The Bank of Canada (BoC) delivered its much-anticipated interest rate cut for the first time in years, and the US Federal Reserve maintained its cautious stance in the face of sticky US inflation.
– **Canada-US Divergence**: The divergence between the BoC and Federal Reserve stances continues to influence the pair. While the BoC is among the first major central banks to enter a rate-cutting cycle, the Fed’s delay due to persistent inflation has kept the US dollar supported.
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### Key Events That Shaped the Recent USD/CAD Trend
– **BoC’s June Rate Cut**: The BoC lowered its benchmark overnight rate by 25 basis points, signaling the start of a gradual loosening cycle. This was broadly expected but still pressured the Canadian dollar as markets priced in the likelihood of more cuts.
– **US Economic Data**: The US continued to release mixed data, especially on inflation and jobs. The Labor Department’s reports indicated a resilient but cooling labor market, while inflation readings remained above the Fed’s 2 percent target, prompting the Fed to hold steady.
– **Market Expectations**: Forward guidance from both central banks influenced investor expectations on the trajectory for each currency. While the BoC sees room for more easing, the Fed’s rhetoric turned marginally less hawkish but stopped short of announcing imminent rate cuts.
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### USD/CAD: Key Support and Resistance Levels
Market participants closely monitored the following levels during the week:
– **Immediate Support**: 1.3600
– **Major Resistance**: 1.3750
– **Psychological Levels**: 1.3500 (support), 1.3800 (resistance)
– After attempting to break above the 1.3750 resistance, the pair faced selling pressure as oil prices recovered and US yields stabilized.
– The 1.3600 support level remained crucial as a break below could spark a more pronounced downside move.
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### Canadian Dollar Factors: What’s Driving the Loonie?
#### 1. **Central Bank Divergence**
– The BoC’s early move on rates marks a significant divergence from the Fed’s cautious approach.
– Markets anticipate at least one additional rate cut by the BoC by year’s end.
– This divergence could cap the Canadian dollar’s upside, especially if US data shows resilience.
#### 2. **Oil Prices**
– As a petro-currency, the Canadian dollar reacts strongly to changes in crude oil prices.
– Recent stabilization in oil prices, partly due to OPEC+ production decisions, provided some support to the currency.
– However, concerns about global growth and demand might limit how much the loonie can benefit, especially if recessionary fears resurface.
#### 3. **Domestic Economic Data**
– Canadian GDP growth remained modest, with household spending showing signs of strain under high interest rates and elevated debt levels.
– Inflation data was in line with the BoC’s expectations, justifying the gradual pace of further rate cuts.
– Labor data showed job gains but also a slight uptick in the unemployment rate, reflecting a slowly loosening job market.
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