Title: USD/CAD Runs Out of Momentum but Retains a Bullish Long-Term Outlook
Original Article by FxWirePro via EconoTimes
Expanded and Rewritten Article
The US dollar to Canadian dollar (USD/CAD) currency pair has seen a strong bullish performance over recent weeks, although recent price action suggests that the bullish momentum may be showing signs of fatigue. Despite the immediate exhaustion in upward movement, technical indicators, macroeconomic fundamentals, and interest rate differentials continue to favor an overall bullish trajectory for the US dollar against the loonie.
This article expands upon the insights originally shared by FxWirePro on EconoTimes and adds extra context and analysis from other reputable financial sources. We will break down the driving forces behind recent price movements, examine technical levels that traders are watching, and review forecasts and macroeconomic conditions expected to guide the pair going forward.
Recent USD/CAD Price Action
USD/CAD has seen a rapid ascent, moving higher over the past few weeks as traders reacted to diverging monetary policy expectations between the Federal Reserve and the Bank of Canada (BoC). However, the pair recently ran into resistance and has shown signs of losing momentum. Despite intraday and daily consolidation, the overall trend continues to point upward.
– The pair made consistent higher highs, touching levels near 1.3740 in recent sessions.
– A failure to break above strong resistance levels around 1.3750 has led to sideways movement.
– Traders observed consolidation within a tight range, suggesting the bullish rally may be taking a breather.
– Nonetheless, key support levels have held firm, allowing for a continuation of the broader bullish thesis.
Fundamental Drivers Supporting USD/CAD Upside
The current macroeconomic landscape supports strength in the USD against the CAD. The following fundamental elements are contributing to this bullish sentiment:
1. Diverging Monetary Policy:
– The Federal Reserve remains steadfast in its hawkish tone.
– Fed Chair Jerome Powell and other officials have maintained that rates will stay elevated until inflation returns sustainably to the 2 percent target. This has maintained US dollar strength broadly across the FX market.
– In contrast, the Bank of Canada has become more cautious. Although Canada recently hiked its benchmark rate to combat inflation, softer labor market data and a slowdown in GDP have increased speculation about a potential pause or rate cut in the latter half of 2024.
2. Inflation and Economic Performance:
– US CPI data remains elevated. The sticky nature of core inflation is keeping the Fed in a tightening stance.
– In Canada, inflation has started to ease. The BoC monitors Core CPI and Trimmed Mean CPI, both of which have shown signs of deceleration.
– Canada’s GDP performance has softened, with Q1 numbers showing less-than-expected growth, leading to increased dovish expectations from the BoC.
3. Commodity Prices and Oil Trade Dynamics:
– Historically, Canada’s economy and its currency are closely linked to oil prices.
– Despite some recent recovery in WTI oil prices, the Canadian dollar has failed to benefit significantly, as global demand concerns continue to weigh on the commodity.
– The normalization of energy prices in 2024, particularly as demand from China weakens, further caps CAD strength.
4. Interest Rate Differentials:
– The yield spread between US and Canadian government bonds has widened, favoring the USD.
– Higher US Treasury yields create additional demand for the dollar, especially in a risk-off environment.
Technical Analysis: USD/CAD Chart Structure Remains Bullish
Technical factors show that while the pair has paused its upward trajectory, the fundamentals suggest an eventual breakout higher.
1. Trendline Breaks and Support Zones:
– The pair remains above its ascending trendline from the lows near 1.3200.
– Immediate support lies near 1.3620 (recent consolidation zone) and 1.3540 (50-Day Moving Average).
– As long as these key support levels are respected, bulls retain control of the medium-term direction
Read more on USD/CAD trading.