U.S. Data Rebound Fuels USD Recovery Against Major Currencies
Adapted from: Matt Weller, Forex.com
The U.S. dollar made a strong comeback recently, reversing some of its previous losses against major currencies like the Canadian dollar (CAD) and the Swiss franc (CHF) following better-than-expected economic data from the United States. Traders were initially growing increasingly confident in a potential Federal Reserve rate cut this year based on a streak of softer inflation and growth figures. However, the release of several robust reports has challenged that narrative, injecting renewed strength into the greenback and modifying market expectations for monetary policy.
This article explores the impact of recent U.S. economic data on the U.S. dollar, particularly its interaction with the Canadian dollar and Swiss franc. We will break down the short-term technical outlook for both USD/CAD and USD/CHF pairs, summarize key economic reports driving this rebound, and discuss implications for Fed policy going forward.
Key U.S. Economic Reports Land Stronger Than Expected
In the past few months, the market consensus had been gradually favoring a more dovish outlook for the Federal Reserve, anticipating one or even multiple rate cuts by the end of 2024. However, that view began unraveling with the release of the following stronger-than-expected data points:
– The ISM Manufacturing PMI for May improved from April’s reading, signaling surprising growth in the factory sector despite expectations for contraction.
– The ISM Services PMI also came in significantly better than forecast, with business activity, new orders, and employment all showing expansion.
– The U.S. Nonfarm Payrolls report for May surprised to the upside, adding 272,000 jobs compared to expectations for just around 185,000. This strong hiring data also came with a tick higher in average hourly earnings, reinforcing wage-driven inflation pressures.
– Weekly jobless claims remained historically low while consumer confidence, as tracked by the Conference Board, bounced back after recent declines.
Together, this sequence of stronger data reinforces the possibility that inflation might remain sticky and economic momentum more resilient than many analysts had proposed. As a result, traders have recalibrated their expectations about the Fed’s next moves.
Fed Policy Outlook Shifts
Following the latest economic releases, markets have begun to rethink the trajectory for the Federal Reserve’s interest rates. According to data from the CME FedWatch Tool:
– Before the recent economic reports, traders were pricing in roughly two rate cuts by year-end, with the first expected to begin as early as September 2024.
– After the May jobs report and robust ISM data, odds of a rate cut as soon as September have fallen significantly, and some analysts are now predicting just one or even no cuts this year.
The Federal Reserve has continually emphasized a data-dependent approach. Strong employment data, combined with persistent inflation pressures, increases the likelihood the Fed will maintain its restrictive stance for an extended period. This reassessment has played a key role in strengthening the U.S. dollar in currency markets.
USD/CAD: Bullish Reversal Gathers Strength
The USD/CAD currency pair had been sliding in recent weeks, pressured by declining USD sentiment and robust Canadian economic data. However, that trend began to reverse following the release of May’s U.S. employment report and other upbeat indicators.
Key drivers for USD/CAD include:
– Rising U.S. Treasury yields, which tend to support the U.S. dollar in forex markets. As rate cut expectations declined, yields on the 2- and 10-year Treasuries have risen, adding to dollar resilience.
– Crude oil prices, which strongly influence the Canadian dollar as a commodity-linked currency. While oil remains relatively firm, lackluster demand growth forecasts have capped potential CAD gains.
– Diverging policy guidance: The Bank of Canada (BoC) cut rates in June, citing progress on inflation and risks to consumer spending. This contrasts with the Fed’s more hawkish tone, giving the U
Read more on USD/CAD trading.