**Canadian Dollar Forecast: USD/CAD Slides Below 1.3700 as Loonie Strengthens Amid Robust Oil Prices and Central Bank Outlook**
*Adapted from an original article by Fiona Cincotta, Forex.com*
The Canadian dollar (CAD) has seen renewed strength against its US counterpart, as the USD/CAD exchange rate slipped below the critical 1.3700 threshold. This recent movement reflects a broader shift in market sentiment, favoring the loonie amid various converging macroeconomic and fundamental factors.
Several structural and short-term trends have aligned to boost the CAD’s performance, including rising oil prices, shifts in monetary policy expectations between the Bank of Canada (BoC) and the Federal Reserve (Fed), and generally improved Canadian economic readings. Below is an in-depth look at the forces shaping the trajectory of the USD/CAD pair and the outlook for the Canadian dollar in the near to medium term.
## Key Developments Behind the Canadian Dollar’s Rise
### 1. USD/CAD Rejection at 1.3750
For the past few weeks, USD/CAD had been trading in a tight range, failing to break above the 1.3750 resistance level. This level has served as a psychological and technical ceiling, limiting the upside of the US dollar against the Canadian currency.
– Monday’s breakout saw the pair dip below the 1.3700 support line, revealing a shift in market sentiment.
– The loonie’s advance coincided with higher oil prices and improved risk appetite in global markets.
Traders are now watching for confirmation that the USD/CAD has entered a more sustained downtrend.
### 2. Oil Prices Offer Tailwind to CAD
As a commodity-linked currency, the Canadian dollar often rises when crude oil prices climb. Canada is one of the world’s largest exporters of oil, particularly to the United States. Consequently, higher oil prices typically mean stronger export revenues, improved terms of trade, and increased demand for CAD.
– West Texas Intermediate (WTI) crude has been trading above $80 per barrel.
– Geopolitical uncertainties, including Middle East tensions and concerns over shipping routes in the Red Sea, have tightened supply expectations.
– Additionally, US inventories have shown signs of decreasing, supporting the bullish oil narrative.
According to the International Energy Agency (IEA), global oil demand remains robust with limited spare capacity, particularly from OPEC+, keeping prices elevated.
### 3. Canadian Economic Data Holding Firm
In recent months, Canadian economic indicators have surprised to the upside, suggesting resilience in the face of a global economic slowdown.
– March’s inflation numbers showed annual CPI holding at 2.9 percent, slightly above expectations.
– Core inflation measures also came in stronger than expected, raising doubts about imminent rate cuts by the BoC.
– The Canadian labor market has continued to show signs of strength, with a stable unemployment rate and consistent wage growth.
This economic backdrop has contributed to expectations that the BoC will delay rate cuts compared to other G10 central banks.
### 4. Diverging Monetary Policy Expectations
One of the most significant drivers of USD/CAD movement recently has been differing views on interest rate trajectories in Canada and the United States.
– The Federal Reserve has shifted toward a more cautious approach, signaling fewer rate cuts than previously anticipated, but recent US data—including a softening labor market and sluggish retail sales—has sparked speculation that cuts may still come in late 2024.
– Conversely, while some analysts had expected the BoC to begin cutting rates earlier than the Fed, stronger inflation and wage data have pushed those expectations back.
Currently, markets are pricing in potential rate cuts from the BoC starting around mid-year, but this outlook could be revised if inflation proves more persistent.
## Technical Analysis: USD/CAD Outlook
From a technical viewpoint, several markers suggest that USD/CAD could be about to enter a new phase of weakening.
– The support at 1.3700 has been
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