**USD/CAD Forecast: US Dollar Gains as Fed Rate Cut Expectations Cool and Tariff Tensions Resurface**
*Adapted and expanded from an article originally published by Fiona Cincotta on Forex.com.*
The US dollar has experienced renewed strength in recent trading sessions, notably against the Canadian dollar, as investor expectations for Federal Reserve rate cuts diminish and trade tensions between major global economies resurface. The USD/CAD pair, a popular forex instrument that tracks the value of the US dollar against the Canadian dollar, has been climbing, consolidating a recovery that began in mid-April.
Several macroeconomic and geopolitical drivers are currently shaping the trajectory of the USD/CAD pair. From shifts in monetary policy sentiment by the Federal Reserve to growing trade friction between the United States and China, and key Canadian economic indicators, multiple forces are pushing the forex market into new territory. This article delves deep into those dynamics and offers an expanded forecast for the USD/CAD pair in the near term.
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## US Dollar Strengthens on Fed Rhetoric
The US dollar has gained momentum in recent days, reversing the losses incurred earlier in Q2 2024. This resurgence is closely tied to changing expectations regarding monetary policy at the US Federal Reserve.
### Key Drivers:
– **Stronger-than-expected US inflation data**: Recent consumer price index (CPI) figures beat expectations, with core inflation remaining persistent. Core CPI excluding food and energy rose 0.3% month-over-month, keeping pressure on policymakers to delay any rate cuts.
– **Improving labor market data**: Non-farm payrolls in April exceeded expectations, while weekly jobless claims have stayed low. This suggests that the labor market remains resilient, a key input into Fed decision-making.
– **Fed officials push back on rate cut conversation**: Several members of the Federal Reserve’s Open Market Committee (FOMC), including Chair Jerome Powell, have openly warned against expecting imminent rate cuts. They emphasized the importance of seeing consistent and sustained progress toward the 2% inflation target before initiating any monetary easing.
As a result, markets are significantly lowering their odds of a rate cut in the upcoming months.
### Market Reaction:
– The CME FedWatch tool now suggests less than a 40% chance of a cut by September 2024, down from over 70% in early April.
– Treasury yields have ticked upward, with the 10-year yield rising above 4.5% following better-than-expected economic data.
– The US Dollar Index (DXY) has rebounded toward the 105 level, helping underpin strength in the USD/CAD pair.
This renewed hawkish shift in Fed policy stance has created a supportive backdrop for the US dollar, particularly against high-beta currencies like the Canadian dollar.
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## Canadian Dollar Pressured by Domestic and External Developments
On the other side of the USD/CAD equation, the Canadian dollar has shown signs of weakening due to a combination of domestic economic softness and global trade tensions.
### Softer Canadian Economic Data:
– **GDP growth concerns**: Canada saw weaker-than-anticipated GDP growth in the first quarter, raising concerns about slowing domestic momentum. While employment numbers have been generally stable, consumption and business investment have lagged.
– **Retail sales and inflation stagnation**: Core retail sales and inflation reports published recently indicate limited domestic demand and price pressure, adding to the case for a potential Bank of Canada (BoC) rate cut.
– **BoC policy outlook**: While central bank officials have not committed to an easing cycle, market participants are increasingly pricing in one or two rate cuts by the end of 2024. The BoC has maintained relatively dovish rhetoric compared to the Fed.
### External Pressures:
– **Trade tensions**: The Canadian economy, heavily reliant on global trade, has faced renewed concerns following hints of renewed trade protectionism between the US and China. With the US raising tariffs on Chinese products across strategic sectors
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