Title: U.S. Economic Data Uplift Sparks Broad-Based USD Recovery Against Canadian Dollar and Swiss Franc
Author Credit: Adapted and expanded from an article by Matt Weller, Forex.com
The U.S. dollar (USD) made a strong resurgence in global foreign exchange markets following the release of improved economic data. After weeks of market uncertainty and oscillation, recent indicators in the form of Nonfarm Payrolls and other economic statistics have provided a much-needed boost for the greenback. Among the currency pairs most affected by this turnaround were USD/CAD (U.S. dollar against Canadian dollar) and USD/CHF (U.S. dollar against Swiss franc), which both saw significant movement in favor of the dollar in early June 2024.
This article delves into the market reactions, economic underpinnings behind them, and the potential outlook for USD against several major currencies over the near-to-medium term.
Macroeconomic Context
The Federal Reserve has spent much of 2024 facing a delicate balancing act between containing inflation and maintaining economic growth. Earlier in the year, markets had priced in multiple interest rate cuts by the Fed, expecting economic softening. However, strong labor market data and persistent inflation pressures have led traders to reassess their expectations.
Recent U.S. economic data that contributed to the shift in sentiment include:
• Nonfarm Payrolls (May 2024): Reported 272,000 new jobs added, surpassing market forecasts of 180,000.
• Average Hourly Earnings: Rose by 0.4% month-over-month, also exceeding expectations.
• Unemployment Rate: Edged higher to 4.0%, though not alarmingly high.
• ISM Services PMI: Rebounded unexpectedly to 53.8 in May from 49.4 in April — a sign of expansion in service sectors.
Collectively, these figures indicate that the American economy retains a surprising level of resilience, prompting major repricing in interest rate expectations. Following the data, the probability of the Federal Reserve cutting interest rates in September fell significantly, as reported by CME FedWatch.
U.S. Dollar Revival: Factors Driving the Shift
1. Labor Market Strength:
– The robust jobs report showed that businesses are hiring at a solid pace.
– Rising wages suggest that consumer spending could remain stable, supporting GDP growth.
– Market expectations for rate cuts receded, pushing Treasury yields higher — a positive for the USD.
2. Inflationary Concerns:
– Higher wages can feed into inflationary pressures, giving the Fed reason to stay cautious on easing.
– Sticky inflation provides further rationale for a prolonged period of elevated interest rates.
3. Interest Rate Repricing:
– Futures markets had previously priced in two to three rate cuts for 2024.
– After the stronger data, markets scaled back those expectations, keeping yields elevated.
– The U.S. dollar tends to benefit from higher yields, especially versus lower-yielding currencies such as the CHF.
4. Global Risk Sentiment:
– As the dollar strengthens, risk-appetite tends to fluctuate.
– Currencies such as the CAD (with exposure to commodities) can weaken alongside declining risk appetite.
USD/CAD Technical Analysis: Breakout Highlights Bullish Momentum
The USD/CAD pair saw a strong upward breakout following the improved data, with price action reversing from a previously bearish channel to test multi-week highs. Key observations in the chart include:
• Prior to the release of data, USD/CAD was trending downward within a modest bearish channel.
• After the NFP data, the pair broke out of this range aggressively to the upside.
• Price surged toward the 1.3800 area, testing highs not seen since late April.
• RSI on the daily chart approached overbought levels, indicating strength in the move but possibility of short-term retracements.
Key Upcoming Price Levels:
• Resistance:
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Read more on USD/CAD trading.