**USD/CAD Faces Headwinds as Fed Chair Powell Adopts Dovish Tone on Interest Rates**
*Original reporting by FXStreet. Additional research and analysis provided.*
The USD/CAD currency pair remained pressured during Friday’s trading session, impacted by a growing belief that the U.S. Federal Reserve may not proceed with additional interest rate hikes in the near term. The shift in market sentiment was sparked by comments from Federal Reserve Chair Jerome Powell during the central bank’s annual Jackson Hole Economic Symposium. Powell acknowledged progress in the fight against inflation but also signaled caution in pushing rates higher, which markets interpreted as a slight dovish turn.
As a result, the U.S. dollar weakened against the Canadian dollar, with the USD/CAD pair struggling to gain traction near the 1.3500 mark. Several key developments influenced market trends on the day, including economic data from both the United States and Canada, changing expectations for monetary policy, and commodity price fluctuations — particularly in crude oil, which heavily impacts the Canadian economy.
### Federal Reserve’s Stance Shifts to a More Cautious Tone
Federal Reserve Chair Jerome Powell used his speech at Jackson Hole to outline the central bank’s current stance on inflation and interest rates. While Powell reiterated the Fed’s commitment to restoring price stability, he also acknowledged notable progress in cooling inflation and made clear that future decisions would be data-dependent going forward.
Key points from Powell’s Jackson Hole remarks:
– The Fed remains dedicated to bringing inflation down to its 2 percent target.
– Inflation has declined meaningfully from its peak in 2022 but remains above desired levels.
– The labor market is showing signs of balancing, with job gains slowing somewhat.
– Future rate decisions will hinge on a range of economic indicators, including inflation, labor market tightness, and consumer spending.
– While further tightening is possible, it is not a foregone conclusion.
Analysts highlighted the contrast in tone compared to previous Fed communications, where the message was more focused on the potential need for multiple rate hikes. This moderation in outlook prompted investors to reassess the odds of an additional rate increase in 2023.
As of Friday, market pricing based on CME FedWatch Tool data showed that investors now assign a roughly 20% probability of another rate hike in the next few months, down from above 40% just weeks earlier. U.S. Treasury yields also fell in response, further weakening the dollar.
### U.S. Dollar Declines Amid Dovish Shift
The U.S. Dollar Index (DXY), which measures the greenback against a basket of six major rival currencies, declined slightly following Powell’s speech, reflecting a pullback in market expectations for U.S. policy tightening.
Factors behind the dollar’s weakness:
– Lower Treasury yields: Benchmark 10-year U.S. yields retreated from recent highs following Powell’s comments, reducing the dollar’s yield advantage.
– Soft economic data: Recent data, including a slowdown in core durable goods orders and weaker purchasing managers’ index (PMI) readings, reinforced the idea that the U.S. economy may not need much more tightening.
– Risk-on sentiment: Equities rallied modestly, supported by the notion that the Fed may not over-tighten and risk a recession.
A weaker dollar worked in favor of its trading counterparts, including the Canadian dollar. The USD/CAD pair drifted lower toward 1.3500 levels, unable to regain upward momentum despite intraday attempts.
### Canadian Dollar Strengthens with Support from Crude Oil and Retail Sales
The Canadian dollar, often closely linked to global commodity prices, particularly oil, continued to find support from strong energy prices. West Texas Intermediate (WTI) crude, the U.S. benchmark, hovered near $80 per barrel during the session, providing a tailwind for the loonie.
Key drivers supporting CAD:
– Oil prices remained resilient after Saudi Arabia and Russia signaled continued production cuts, tightening the global supply outlook.
– Statistics Canada reported
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