**US Dollar Outlook: USD/CAD Extends Gains in Three-Day Rally**
Original article by Matt Weller, reposted with enhancements and market context.
The US dollar (USD) has rallied against the Canadian dollar (CAD) over the past three days, signaling renewed strength in USD/CAD. This surge has been underpinned by a blend of strong US economic data, hawkish commentary from Federal Reserve officials, and relative weakness in oil prices, which traditionally correlate to the Canadian dollar. The pair’s rebound followed a period of softness through December 2024, driven by rate cut expectations and seasonal dollar weakness. With the first quarter of 2025 now underway, shifting monetary expectations and global risk sentiment are re-aligning market trends.
This article delves into the primary drivers of this USD/CAD rally, technical forecasts, and the macroeconomic backdrop shaping current price action.
## Key Drivers Behind the USD/CAD Rally
1. **Resilient US Economic Data**
– Recent US macroeconomic indicators have outperformed expectations. December’s jobs report showed nonfarm payrolls increasing by 216,000, surpassing the 170,000 forecast.
– The unemployment rate held steady at 3.7%, while average hourly earnings rose 0.4% month on month, reflecting continued inflationary pressure.
– The stronger labor market and rising wages have reinforced the view that the Federal Reserve may remain cautious about cutting interest rates prematurely.
2. **Hawkish Federal Reserve Commentary**
– Federal Reserve officials have pushed back on market expectations for aggressive rate cuts, urging investors to anticipate a slower pace.
– FOMC minutes from the December meeting revealed concerns over loosening policy too quickly, stressing the importance of remaining data dependent.
– Federal Reserve Governor Michelle Bowman and New York Fed President John Williams expressed caution about reducing interest rates, citing enduring inflation concerns, particularly in core services.
3. **Canadian Economic Challenges**
– Canada’s economy showed signs of stagnation in late 2024, with GDP contracting slightly in Q3 and minimal growth indicated for Q4.
– The Canadian labor market has softened, with the December jobs report displaying a modest increase of 0.6k jobs, significantly below the 13.5k expected.
– The Bank of Canada (BoC) is seen as being among the G10 central banks most likely to cut rates early in 2025, as high interest rates put pressure on Canadian households facing elevated debt levels.
4. **Falling Crude Oil Prices**
– WTI crude oil prices have dipped below $72 per barrel as of early January 2025, influenced by concerns about global demand and increased US production.
– The Canadian dollar is closely linked to oil prices, given the country’s significant energy exports. The decline in oil has therefore weighed on the CAD.
– Geopolitical risks in the Middle East and output discussions among OPEC+ have failed to provide enough support for higher oil prices, indicating ample supply in energy markets.
## USD/CAD: Technical Analysis and Forecast
Since bottoming near 1.3175 in mid-December 2024, the USD/CAD pair has seen a notable rebound, rising over 2% to approach the 1.3400 handle. This rally reflects broader USD strength and CAD underperformance.
**Key technical insights:**
– USD/CAD broke above the short-term downtrend line formed in early December, signaling a trend reversal.
– The pair has reclaimed its 50-day simple moving average (SMA) near 1.3370 and is attempting to build support above this key level.
– Momentum indicators, such as the Relative Strength Index (RSI), show a return to bullish territory without being overbought, suggesting room for further upside.
– Resistance lies near the 1.3450 level, coinciding with the December highs. A move above this zone would confirm a more sustained
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