Title: USD/CAD Hovers Below 1.3750 as Dovish Fed Expectations Weigh on US Dollar
Author: Adapted from original reporting by FXStreet
The US dollar (USD) continues to trade on the defensive against the Canadian dollar (CAD), with the USD/CAD currency pair lingering below the 1.3750 threshold. The weakening greenback reflects growing market anticipation of potential monetary easing by the Federal Reserve, which has in turn weighed on Treasury yields and undermined dollar strength in recent sessions.
Following the release of weaker-than-expected US economic indicators and increasingly dovish commentary from Federal Reserve officials, traders have started to price in rate cuts, pulling the USD lower. At the same time, the Canadian dollar has found some support amid improved risk sentiment and firming oil prices, limiting USD/CAD’s upside moves.
Here is a comprehensive overview of the recent USD/CAD movement and the contributing macroeconomic factors shaping the currency pair’s trajectory:
US Dollar Pressured by Fed Rate Cut Bets
The greenback’s recent losses can be understood in the context of a shift in monetary policy expectations. Having maintained a prolonged period of interest rate hikes to combat inflation, the Federal Reserve now faces softening economic data and slowing inflation — two major catalysts that have prompted speculation about the timeline for interest rate cuts.
Key reasons behind the USD’s recent drop include:
• Weaker Labor Market Indicators: The latest reports have indicated moderation in job creation and slowing wage growth. For example, recent Job Openings and Labor Turnover (JOLTS) survey data showed a decline in job openings, pointing to cooling labor demand.
• Lower ISM Services Data: The Institute for Supply Management’s Non-Manufacturing PMI came in lower than anticipated, with slowing activity across the US services sector — a key driver of the US economy.
• Falling Treasury Yields: Benchmark 10-year US Treasury yields have slipped below 4.4 percent, reflecting mounting expectations that the Fed may lower rates by September 2024.
• Speech by Fed Chair Jerome Powell: Although Powell reaffirmed the central bank’s commitment to a data-driven path, he acknowledged the risk of being overly restrictive in monetary policy, which markets interpreted as a dovish tone.
According to the CME FedWatch Tool, traders are now pricing in a 60 to 70 percent probability of a rate cut by September. This dovish outlook has sapped interest in the USD, pushing USD/CAD lower as investors seek better returns elsewhere.
Oil Prices and Canadian Dollar Support
Canada is one of the world’s major oil exporters, making crude prices a key driver of the CAD’s valuation. In recent sessions, oil markets have shown bullish momentum thanks to geopolitical tensions in the Middle East and ongoing production cuts from OPEC+ members.
Key trends that have supported the CAD include:
• Rising Crude Oil Prices: WTI crude has been trading above the $80 per barrel mark amid reduced US inventories and strong summer demand prospects. Oil’s strength lends support to the CAD due to its positive impact on Canada’s trade balance and government revenues.
• Canada’s Economic Resilience: Despite a slowdown in inflation, Canada’s GDP growth has remained modestly positive. While this hasn’t eliminated the possibility of rate cuts by the Bank of Canada (BoC), the economic data has been resilient enough to bolster confidence in the CAD.
• Bank of Canada’s Policy Divergence: Unlike the Federal Reserve, which faces intensifying calls to cut rates, the BoC has adopted a more cautious tone. At its latest meeting, the BoC held rates steady and emphasized the need for further data evaluation before switching policy, providing modest support to the loonie.
USD/CAD Technical Overview
As of the latest session, the USD/CAD pair is trading near 1.3720, having failed to reclaim the 1.3750 resistance level. The pair has been range-bound, with price action capped between the
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