**Canadian Dollar Retreats as US Dollar Strengthens: Key Drivers Behind the Market Shift**
*Original reporting by Christian Borjon Valencia, FXStreet – July 24, 2024*
The Canadian dollar (CAD) experienced a weakening trend on Wednesday, breaking a five-day streak of gains against the US dollar (USD). This shift in momentum stemmed from a combination of factors, including stabilizing US Treasury yields, profit-taking behavior from investors, and shifts in monetary policy expectations. As global markets remain reactive to economic data and central bank signals, the USD has regained ground, asserting its dominance across several key currency pairs, especially against the Canadian dollar.
This article provides a comprehensive analysis of the factors behind the CAD’s recent loss, the broader macroeconomic picture affecting the USD/CAD exchange rate, and the outlook moving forward. It consolidates the latest updates from FXStreet and additional sources such as Bloomberg, Financial Times, and Reuters for a well-rounded view.
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**USD/CAD Rally Reverses CAD Upside**
The USD/CAD pair climbed roughly 0.50% on the day, rising from monthly lows near 1.3615 to trade above the 1.3680 handle by the North American close. Following several days of decline, the US dollar found renewed strength, pushing commodity-linked currencies like the Canadian dollar lower despite strong recent economic performance from Canada.
Key levels in the USD/CAD exchange rate:
– Intraday high: 1.3687
– Support zone: 1.3600–1.3615 (prior resistance turned support)
– Resistance zone: 1.3700–1.3725 (breach could indicate bullish confirmation)
Traders watch these technical thresholds closely to determine if the upward move in USD/CAD is sustainable or temporary.
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**US Dollar Firms as Yields and Fed Expectations Rebound**
The momentum in the US dollar was largely attributed to a reversal in US Treasury yields, which rose amid reassessment of the US economic landscape. Market participants began to temper expectations for a dovish Federal Reserve, as recent data on labor and inflation pointed toward resilience in economic activity.
Factors driving USD strength:
– The 10-year US Treasury yield rose to 4.23% from 4.18% the previous day.
– Stronger-than-expected housing market data showed US new home sales increasing 3.2% in June.
– Markets reprice expectations for a September interest rate cut from the Federal Reserve, with CME FedWatch Tool showing odds dropping from 80% to below 65%.
Analysts argue that until there is clearer evidence that inflation is returning decisively to the Fed’s 2% target, policymakers will likely err on the side of caution regarding rate cuts. Fed Chair Jerome Powell’s recent comments on managing inflation “with care” have further reinforced the sentiment that rate cuts, if any, may only come later this year or early 2025.
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**Canadian Dollar Loses Momentum Despite Domestic Strength**
While the Canadian dollar had previously gained on the back of strong domestic economic data, its rally paused on Wednesday as global forces took the reins. Canada’s latest Consumer Price Index (CPI) readings have shown inflation steadily trending down, increasing the likelihood of another interest rate cut by the Bank of Canada (BoC) in the upcoming meetings.
Key economic indicators in Canada:
– June inflation rate slowed to 2.1%, just above the BoC’s 2% target
– Core inflation measures, which exclude volatile items, also declined slightly
– Wage growth remains steady, but labor market shows signs of cooling, with the unemployment rate rising to 6.5% in June
Expectations for the BoC are as follows:
– Markets are pricing in a high probability of a second consecutive rate cut at the September policy meeting
– The current BoC policy interest rate stands at 4.50% after a 25-basis-point cut in July
– Governor
Read more on USD/CAD trading.