**Canadian Dollar Retreats as US Dollar Gains Momentum: A Closer Look at Market Drivers**
*By FXStreet Staff, adapted and expanded for revised analysis*
The Canadian dollar (CAD) saw a marked reversal in trend, snapping a three-day winning streak after posting moderate losses against the United States dollar (USD) in Thursday’s trading session. Despite a week of optimistic gains for the loonie, a mix of lower commodity prices, a pullback in risk sentiment, and a resilient U.S. dollar underpinned the currency’s decline.
This shift reflects a broader realignment in the FX markets as traders reassess risk exposure, fiscal policy from central banks, and broader macroeconomic conditions. As USD/CAD edged higher to trade near 1.3680 in the North American trading hours, several fundamental drivers converged to pin the loonie lower.
This article explores the key factors behind the CAD’s recent downturn, how evolving macroeconomic forces shape currency movements, and what analysts anticipate in the near term for the USD/CAD pair.
## Key Factors Behind the Loonie’s Pullback
The Canadian dollar’s weakness can be attributed to the confluence of several domestic and global factors:
### 1. Strength in the US Dollar
The USD shrugged off early-session weakness, reversing prior losses as markets leaned toward a ‘higher-for-longer’ outlook on U.S. interest rates. The dollar has broadly benefited from a reassessment of the Federal Reserve’s monetary policy, particularly after stronger-than-expected data reinforced expectations that the Fed may delay rate cuts.
– The U.S. dollar index (DXY), which tracks the greenback against a basket of six major currencies, climbed toward 105.00 on Thursday, recouping earlier losses.
– Traders shifted into the relatively safer USD amid geopolitical unease and downgraded sentiment toward risk assets.
### 2. Soft Commodity Prices
As Canada is a resource-rich economy, the loonie is heavily influenced by commodity prices, particularly crude oil. Crude oil prices, measured via West Texas Intermediate (WTI), retreated on Thursday:
– WTI slipped below $80 per barrel despite ongoing concerns in the Middle East. A forecast of rising U.S. crude inventories and reduced expectations for seasonal demand exerted downward pressure on energy markets.
– Lower oil prices tend to weigh on the CAD, which is often considered a “petro-currency” given Canada’s status as a leading oil exporter.
### 3. Shifting Risk Sentiment
Markets have cooled off from earlier optimism surrounding global economic stabilization and AI-led equity rallies. On Thursday:
– U.S. stock markets were mixed, with technology-heavy indices holding up but broader indices reflecting caution.
– Economic uncertainty in China and increased volatility in corporate earnings contributed to a moderation in appetite for risk assets, indirectly affecting commodity-linked and risk-sensitive currencies like the CAD.
### 4. Domestic Economic Data and the BoC Outlook
The Bank of Canada (BoC) recently delivered its first rate cut of the cycle, lowering its key overnight rate by 25 basis points in June. This move has set the tone for a looser monetary policy relative to the Federal Reserve, creating further divergence between the CAD and USD.
– Markets anticipate the BoC to continue cutting interest rates later in 2024, depending on inflation and growth trends.
– This outlook contrasts with the Fed’s cautious stance. Despite falling inflation in the U.S., policymakers have opted to wait for more evidence before initiating rate reductions.
Canadian economic indicators have painted a mixed picture:
– GDP growth remains sluggish, with the Canadian economy growing just 0.4% annualized in Q1 2024.
– Core CPI showed signs of cooling, but inflation volatility continues to challenge BoC forecasts.
These data points have strengthened the case for BoC dovishness, weakening CAD prospects further.
## USD/CAD Market Overview: Technical and Sentiment Analysis
As of the close of Thursday trade:
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