USD/CAD Struggles Below 1.3750 as US Dollar Weakens on Fed Rate Cut Expectations
Original Article by FXStreet Staff
The USD/CAD currency pair remains under pressure as it continues to trade below the 1.3750 level, primarily driven by strengthening expectations that the Federal Reserve may start cutting interest rates within the next few months. Market sentiment now leans heavily toward a monetary policy shift in the United States, reducing demand for the greenback and allowing the Canadian dollar to gain ground.
Current Market Overview
– At the time of reporting, the USD/CAD pair is oscillating around 1.3740, stuck in a corrective phase that began after repeated rejections above the 1.3800 mark.
– The loonie is finding support from resilient domestic macroeconomic fundamentals and a steady performance in crude oil prices—Canada’s key export—which are helping bolster demand for the Canadian currency.
– The US dollar, on the other hand, has subdued buying demand as speculation intensifies that the Federal Reserve could begin reducing interest rates by the end of Q3 2024 following signs of softening inflation and weaker economic output.
Factors Pressuring USD/CAD
Several factors are contributing to the current trend in the USD/CAD pair:
1. Fed Rate Cut Speculation:
– Recent US economic data suggests a cooling in both pricing pressures and employment activity.
– The latest Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation metric, showed a year-over-year increase of 2.6 percent in May, down from 2.7 percent in the previous release.
– Core PCE rates (which exclude volatile food and energy prices) also declined, strengthening the case for rate normalization by the Federal Reserve.
– According to the CME FedWatch Tool, markets are now pricing in a 65 percent probability of at least one rate cut by the September FOMC meeting.
2. US Economic Outlook:
– Nonfarm Payrolls and unemployment claims have shown signs of slowing momentum.
– The ISM Manufacturing PMI for June dropped below 50, indicating contraction in the manufacturing sector.
– Consumer confidence and retail sales data also reflect more cautious spending patterns, pointing to reduced economic momentum.
3. Canadian Dollar Support:
– The Canadian economy is showing stable performance, aided by its robust labor market and resilient inflation figures.
– Crude oil prices, a key export commodity for Canada, remain elevated due to geopolitical risks and constrained global supply.
– The Bank of Canada (BoC), while exploring potential rate reductions, has taken a more cautious stance than the Fed, offering underlying support to the CAD.
Energy Prices and Their Influence
The Canadian dollar, often dubbed a “petro-currency,” is particularly sensitive to movement in crude oil prices. Recently:
– Crude oil has traded in a relatively stable range, hovering around the $82 to $85 per barrel mark as of early July 2024.
– Supply disruptions in the Middle East and limited output increases by OPEC+ members have kept oil markets tight.
– U.S. inventories have also seen consistent drawdowns, signaling robust demand during the summer driving season.
– Higher oil prices typically benefit the loonie, providing a fundamental backdrop for its recent strength against the US dollar.
US Dollar Index Retreats
The US Dollar Index (DXY), a weighted measure of the greenback’s performance against a basket of six major currencies, is also showing signs of weakening:
– The DXY has slipped below 105.00, with recent sessions marked by selling pressure amid dovish Fed narratives.
– As investors weigh the likelihood of rate cuts, the dollar is losing its yield-based advantage against peers such as the Euro, British pound, and Canadian dollar.
– Technical indicators suggest a bearish tilt for the DXY unless incoming macro data reverses current policy expectations.
Technical Analysis: USD/CAD
From a technical perspective, the USD
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