**USD/CAD Slides Toward 1.3750 as Fed Rate Cut Bets Intensify**
*By Anil Panchal; Additional content and research compiled by AI from publicly available sources*
The USD/CAD currency pair moved lower toward the 1.3750 mark in recent trading sessions as softening U.S. economic data, signs of cooling inflation, and cautious shifts in monetary policy signals have led financial markets to ramp up expectations of an upcoming interest rate cut by the U.S. Federal Reserve. Moreover, rising oil prices and improvements in Canadian economic indicators have lent support to the Canadian dollar, applying further downward pressure on the pair.
This detailed analysis explores the latest market dynamics driving the USD/CAD exchange rate, summarizes key economic indicators impacting each currency, and discusses what traders can expect going forward based on changing monetary policy expectations, geopolitical developments, and commodity price shifts.
—
### Recap of Recent USD/CAD Movement
In recent trading, the USD/CAD currency pair weakened to levels near 1.3750 after retreating from a high around 1.3810 earlier in the week. This shift reflects a confluence of factors including:
– Growing market anticipation that the Federal Reserve will start cutting interest rates later this year.
– Dovish tones from U.S. central bank officials hinting at increased concern over slowing employment and tightening credit conditions.
– A modest recovery in crude oil prices, which strengthens the Canadian dollar due to Canada’s status as a major oil exporter.
– Weakened U.S. Treasury yields, signaling declining investor confidence in the U.S. dollar’s near-term strength.
—
### Key Drivers of the USD Weakness
#### 1. Increased Odds of Fed Rate Cuts
The U.S. Federal Reserve has kept its benchmark federal funds rate at a 23-year high between 5.25% and 5.50% since July 2023 to combat persistently high inflation. However, a series of recent soft economic data has increased the likelihood that the Fed will pivot from its tightening cycle.
– Labor market data showed that the U.S. unemployment rate rose to 4.0% in May 2024 from 3.9% in April.
– Non-farm payrolls also softened, coming in below expectations, signaling a slowdown in job creation.
– The U.S. ISM Services Index dropped unexpectedly to 48.8 in May, the lowest reading since December 2022, falling further below the 50 mark that separates expansion from contraction.
– Core Personal Consumption Expenditures (PCE), the Fed’s preferred measure of inflation, rose just 0.2% month-over-month in May, in line with expectations but still trending lower from recent highs.
Due to these developments:
– CME FedWatch Tool currently estimates over a 65% probability of a 25-basis-point rate cut by the Fed at its September 2024 meeting.
– Bond traders have also priced in at least two rate cuts before the end of the year.
This shift in sentiment has dampened the U.S. dollar’s prospects, prompting capital flows away from the dollar in anticipation of declining yields.
#### 2. Decline in Treasury Yields
The benchmark 10-year U.S. Treasury yield has lost ground, falling from the 4.6% level in late May to approximately 4.25% in early June. Lower yields tend to reduce the appeal of U.S. government bonds and, by extension, the dollar.
– The 2-year Treasury yield, which is more sensitive to short-term rate expectations, has also fallen as traders bet on a softer Fed stance.
—
### CAD Benefiting from Oil Market and Domestic Data
#### 1. Crude Oil Recovery Supports CAD
Canada is the fifth-largest crude oil producer in the world and relies heavily on oil exports. The Canadian dollar tends to move in tandem with oil prices.
– WTI Crude Oil prices have rebounded above $
Read more on USD/CAD trading.