**”Dollar’s Dilemma: Fade in Volatility Sparks New Crossroads for GBP/USD & USD/CAD in Q2 2024″**

**GBP/USD & USD/CAD Outlook: U.S. Dollar Under Pressure as Volatility Fades**

*By Matt Weller, CFA, CMT – Adapted and expanded from Forex.com analysis.*

The U.S. dollar has experienced a tumultuous few weeks, shaped by shifting central bank policies, signs of economic moderation, and evolving risk sentiment in global markets. As volatility subsides across the forex markets, the greenback’s rally faces fresh headwinds, with key major pairs, particularly GBP/USD and USD/CAD, drawing traders’ attention. This article explores the current conditions affecting these pairs, dissects the major fundamental and technical drivers, and offers an in-depth outlook on potential moves as Q2 progresses.

### Fading Volatility and the U.S. Dollar Outlook

Over recent months, the U.S. dollar staged a robust recovery driven by persistent inflation and resilient U.S. economic data. As a result, expectations of imminent Federal Reserve rate cuts were aggressively pared back as traders recalibrated their outlook for U.S. monetary policy. However, in late May and early June 2024, a series of mixed data prints, persistent signs of inflation moderation, and firming signals of global growth have gradually eroded some of the dollar’s gains.

Key highlights:

– **Diminished FX Volatility:** The CVIX, a widely-watched measure of currency volatility, has dropped to multi-month lows, implying that traders’ expectations for large price swings have faded back to average levels.
– **Shifting Rate Cut Expectations:** The market continues to toggle between hopes for a September rate cut and the possibility of a later move, hinging on inflation data and U.S. employment trends.
– **Global Equities Rally:** Amid the waning volatility, equity markets have staged a notable rally, with the S&P 500 rising to fresh record highs, as investors increasingly price in the prospect of a soft landing. This has dampened the dollar’s safe-haven appeal and prompted flows into higher-yielding and risk-sensitive currencies.

### Major Fundamental Drivers Affecting GBP/USD and USD/CAD

#### U.S. Policymaker and Economic Developments

Several factors continue to set the macroeconomic context for the U.S. dollar. Most notably:

– **Moderating Inflation:** Core personal consumption expenditures (PCE) inflation readings remain stubborn but suggest a slow drift toward the Fed’s 2 percent target. Progress, while sluggish, offers a clearer path for potential rate cuts.
– **Labor Market Slack:** The most recent nonfarm payrolls beat expectations but was accompanied by signs of softening wage pressures and a modest uptick in the unemployment rate. The labor market appears to be coming off the boil, supporting the Fed’s gradual easing stance.
– **Fed Rhetoric:** Fed officials have adopted a more balanced tone, acknowledging the need for additional data while hinting that surges in policy rates may have peaked. Terminal rate expectations appear anchored, with the debate now centered on timing and the magnitude of rate cuts.

#### The U.K. and British Pound Drivers

For the pound, domestic and geopolitical drivers are influencing sentiment:

– **Improved Growth Prospects:** The U.K. has demonstrated modest but consistent expansion, avoiding recession in 2024. This economic resilience, combined with controlled inflation, has strengthened the pound’s case.
– **Bank of England Caution:** The Bank of England (BoE) maintains a more hawkish tone than its European counterparts, reiterating that progress on inflation must be sustained before considering significant easing.
– **General Election Uncertainty:** The upcoming general election adds an element of political uncertainty, though markets currently expect only modest impacts due to relative policy consensus.

#### Canadian Dollar Fundamentals

The Canadian dollar’s movement against the greenback has been driven by:

– **Bank of Canada Rate Movements:** The BoC has recently taken a proactive stance, initiating a rate cut ahead of the Fed. This divergence weighed initially on

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