Title: U.S. Data Rebounds: USD Strengthens Against CAD and CHF
By Matt Weller, sourced and expanded upon from the original article on FOREX.com
The U.S. dollar experienced a solid rebound recently after a series of economic data prints indicated renewed strength in the American economy. The greenback, which has seen volatility amid shifting interest rate expectations and global macroeconomic uncertainty, found new momentum, particularly against the Canadian dollar (CAD) and Swiss franc (CHF).
This shift in sentiment came following reports showing better-than-expected economic activity in the United States, which has, at least for now, recalibrated market expectations regarding potential Federal Reserve rate cuts in the second half of 2024. As a result, traders are reassessing their positions in key currency pairs such as USD/CAD and USD/CHF.
In this analysis, we will review the impact of U.S. economic data on the dollar, delve into the recent moves in USD/CAD and USD/CHF, and explore technical indicators and broader macroeconomic factors influencing the forex market.
Recent U.S. Economic Data Surprises Markets
A strong round of U.S. economic releases reversed the dollar’s recent losses, encouraging buyers and suggesting the Fed may delay rate cuts. Key data contributing to the dollar’s rally included:
– Retail Sales: Advanced estimates for April showed an increase of 0.7% month-over-month, beating economists’ expectations of around 0.4%. A sharp upward revision to the March figures further contributed to the positive sentiment.
– Industrial Production: April data revealed a 0.4% increase, marking the third straight month of positive gains.
– Jobless Claims: Weekly initial jobless claims dropped to 222,000, below consensus expectations, signaling continued labor market resilience.
– Empire State Manufacturing Index: Though still negative, the -15.6 reading was better than the forecast of -18, suggesting some stabilization in Northeast factory activity.
– Housing Starts: April housing data was robust, posting a rise of 5.7% year-over-year, indicating solid residential construction activity despite higher mortgage rates.
These data points collectively reaffirmed the narrative that the U.S. economy remains resilient, enduring the Federal Reserve’s tight monetary policy, and possibly forestalling rate cuts.
Federal Reserve Rate Expectations Shift
Before the stronger economic data releases, markets heavily priced in two rate cuts for 2024. However, after the data:
– Traders adjusted expectations, now predicting only one cut in late Q4 or even none if inflation proves sticky.
– Fed Funds futures as of mid-May now imply less than a 50% probability of a rate cut by September.
– Recent comments from Fed officials, such as Chair Jerome Powell and NY Fed President John Williams, echoed a wait-and-see approach, reinforcing a data-dependent policy stance.
The recalibration of rate expectations had a tangible effect on treasury yields and the broad U.S. dollar index (DXY), which saw a rebound from monthly lows.
USD/CAD Technical and Fundamental Analysis
The USD/CAD currency pair, sensitive to both economic differentials and commodity trends (especially oil), saw notable movement following the U.S. data releases.
Fundamentals Driving USD/CAD:
– U.S. data boosts greenback: With economic strength suggesting fewer rate cuts from the Fed, the dollar appreciated.
– Canada’s economic outlook diverges: Contrasting data from Canada (such as softer GDP and employment results) has increased speculation that the Bank of Canada (BoC) may soon begin easing.
– Oil prices volatile: WTI crude, a key driver of CAD, has declined in recent sessions amid growing inventories and sluggish Chinese demand, further pressuring the loonie.
– BoC expectations: Traders now see a growing chance of a rate cut as early as July 2024, particularly if inflation slows further.
Technical Levels in USD/CAD (as of time of writing):
– Support: 1.3600 level holding as
Read more on USD/CAD trading.