Title: USD/CAD Forecast: Bulls Maintain Momentum Towards 1.3880 – Highest Level Since May
Author: Adapted from original analysis by Teodor Nichelson on FXStreet.com
Date: June 21, 2024
The USD/CAD pair has seen a sustained upward trajectory, recording gains for multiple consecutive sessions and climbing towards its highest levels since May 21, driven by a combination of robust U.S. economic data and weakening sentiment around the Canadian dollar. On June 21, the pair rallied to as high as 1.3880 before consolidating. This upward momentum reflects a bullish bias that appears poised to remain in control in the near term.
This article examines the fundamental and technical landscape driving USD/CAD, using insights from FXStreet’s Teodor Nichelson, along with additional data from market sources, to present a comprehensive forecast.
Key Developments Behind the USD/CAD Rally
Several interrelated factors contribute to the positive momentum in the USD/CAD currency pair. These include:
1. Hawkish U.S. Federal Reserve Policy Outlook
2. Trend of Economic Outperformance in the U.S.
3. Weak Canadian Macroeconomic Data
4. Falling Crude Oil Prices Weakening the Canadian Dollar
5. Technical Support for Bullish Momentum
Let’s delve into each of these components.
1. Hawkish U.S. Federal Reserve Continues to Support USD
The Federal Reserve’s decision to maintain its hawkish posture amid still-elevated inflation has been a critical tailwind for the U.S. dollar. The June Federal Open Market Committee (FOMC) meeting reinforced this stance, with policymakers suggesting the possibility of only one rate cut in the remainder of 2024, contrary to earlier market expectations for a faster easing cycle. This shift raised the appeal of the dollar against its counterparts, including the Canadian dollar.
Highlights from recent Fed communications:
– Fed Chairman Jerome Powell reiterated a data-dependent policy approach, emphasizing the need for “greater confidence” that inflation is declining before easing policy.
– In its Summary of Economic Projections, the Fed projected only one 25-basis-point cut for 2024, down from three cuts initially forecast in March.
– Core Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge, remains well above its 2 percent target.
The prospect of higher U.S. interest rates for longer increases demand for the greenback due to higher yields in Treasury markets, boosting the USD broadly and in USD/CAD specifically.
2. U.S. Economic Data Continues to Outperform Expectations
The strong performance of the U.S. economy provides underlying support to the dollar. U.S. retail sales and labor market data have consistently printed above expectations, suggesting robust consumer demand and a healthy employment backdrop.
Key data points from the past two weeks include:
– Retail Sales: U.S. core retail sales rose 0.2 percent in May versus the consensus estimate of 0.1 percent.
– Jobless Claims: Initial jobless claims declined to 238,000 from 243,000.
– Industrial Production: May figures showed a surprising rebound, ticking up 0.9 percent against expectations for just 0.3 percent.
Such resilience undercuts the case for an easing cycle in the near term, solidifying investors’ conviction that U.S. monetary policy will remain restrictive and interest rate differentials will favor the dollar over the loonie.
3. Canadian Economic Fundamentals Lose Momentum
In contrast to U.S. strength, Canadian economic data has presented a weaker picture, prompting the Bank of Canada (BoC) to begin easing policy.
Recent economic indicators in Canada:
– GDP Growth: Canada’s economy contracted by 0.2 percent in April, missing forecasts and highlighting softer momentum.
– Inflation: Headline CPI eased to 2.7 percent in May, falling closer to the BoC’s 2 percent target and supporting further rate cuts.
Read more on USD/CAD trading.