**Canadian Dollar Outlook: USD/CAD Faces Downward Pressure as US Dollar Weakens**
*Adapted and expanded from the original article by Matt Weller, FOREX.com*
The Canadian dollar (CAD) has shown renewed strength in recent trading sessions, recovering some ground against its US counterpart amid broader weakness in the US dollar (USD). The USD/CAD currency pair has pulled back from recent highs, indicating a shift in market sentiment as investors react to evolving economic data, central bank expectations, and commodity price movements.
This article explores the factors influencing USD/CAD, the macroeconomic backdrop for both Canada and the United States, and the technical outlook for the pair. It draws from recent analysis by FOREX.com’s Matt Weller and incorporates up-to-date context from broader market trends and expert commentary.
## Canadian Dollar Gains as US Dollar Softens
In recent sessions, USD/CAD has come under pressure, with the US dollar losing momentum against most major currencies. The Canadian dollar, by contrast, has found support from relatively hawkish signals from the Bank of Canada (BoC), stable oil prices, and improving trade balance data.
### Key Drivers Behind the USD Weakness
Several factors have led to the US dollar’s recent decline, as seen in the DXY US Dollar Index, which measures the greenback’s performance against a basket of major currencies:
– **Easing US inflation pressures**: Recent Consumer Price Index (CPI) prints have suggested that inflation in the US may be cooling. The April CPI report showed headline inflation rising 0.3% month-over-month, slightly below market expectations. Core inflation (excluding food and energy) also softened to 0.3%.
– **Dovish Federal Reserve expectations**: Federal Reserve officials have begun acknowledging the possibility of rate cuts later in 2024. Fed Fund Futures markets are currently pricing in two potential rate cuts this year, with the first possibly arriving in September, depending on how inflation evolves.
– **Soft US economic data**: In addition to moderation in inflation, other economic indicators, such as retail sales and manufacturing activity, have shown signs of slowing, further undermining the USD’s strength.
### Canadian Dollar Tailwinds
Against this backdrop, the Canadian dollar has benefited from several supportive factors:
– **Bank of Canada on hold but cautious**: While the BoC has held interest rates steady in recent meetings, it has signaled that rate cuts will proceed cautiously and only when inflation shows a clear downtrend. BoC Governor Tiff Macklem recently acknowledged that although inflation is trending lower, the central bank needs “more evidence” before initiating cuts.
– **Stronger trade performance**: Canada has reported a narrowing trade deficit, helped by stable energy exports and improving demand for industrial goods. In April, Statistics Canada noted that Canada’s merchandise trade deficit shrunk to CAD 1.0 billion, better than forecasts.
– **Oil prices stabilizing**: Crude oil, one of Canada’s primary exports, has maintained relatively high price levels, providing a tailwind for CAD. West Texas Intermediate (WTI) prices have stabilized in the $75–$80 per barrel range, supporting Canada’s terms of trade.
## Technical Outlook for USD/CAD
From a technical perspective, the USD/CAD pair has slipped beneath key support levels as the downward trend gains momentum.
– **Key support level at 1.3600**: The pair broke below 1.3600, a psychological and technical support zone, suggesting bearish sentiment is taking hold.
– **50-day moving average breach**: The recent decline has pushed the pair below its 50-day moving average, a closely watched indicator that signals potential for further downside.
– **Next support zone around 1.3480–1.3500**: Traders will be watching whether the pair finds support near this zone, representing previous monthly lows.
– **Relative Strength Index (RSI)**: The
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