**Canadian Dollar Outlook: USD/CAD Breaks to Multi-Month Highs Amid Diverging Economic Signals**
*Based on content by James Stanley, originally published on Forex Factory.*
The Canadian Dollar (CAD) has continued its recent trend of weakness as the U.S. Dollar (USD) pushed the USD/CAD currency pair to its highest level since mid-November. This movement reflects a growing divergence in monetary policy expectations and macroeconomic signals between the United States and Canada. With ongoing inflation concerns, central bank strategies, and broader risk sentiment influencing the forex market, the path forward for USD/CAD remains a central focus for currency traders.
## USD/CAD Climbs to New Cycle Highs
The USD/CAD currency pair has made a significant move, pushing above the 1.3800 level and reaching heights not seen since November 2023. This upward breakout signifies a continuation of bullish price action that has been gradually building momentum since the January lows at around 1.3180.
**Key levels and patterns:**
– USD/CAD broke above key resistance around 1.3725, which had previously capped upside attempts on multiple occasions throughout March and early April.
– The pair has carved out a bullish continuation pattern, suggesting sustained demand for USD as investors price in the Bank of Canada’s dovish pivot compared to the more hawkish Federal Reserve.
– The 1.3800 level, though psychologically significant, did little to hold off bullish momentum, and traders are now eyeing the 1.3900 mark as the next major resistance.
– Technical indicators such as Relative Strength Index (RSI) are approaching overbought territory but have not yet issued a reversal warning, implying further upside potential in the short term.
## Diverging Central Bank Paths Fuel the Move
The primary driver of USD/CAD’s recent rally has been the divergence in monetary policy expectations between the Federal Reserve and the Bank of Canada (BoC).
### Bank of Canada
The Bank of Canada is showing increasing openness to rate cuts in the coming quarters, following signals that inflation pressures are under control.
– Canada’s headline CPI cooled to 2.9% year-over-year in March 2024, down from 3.1% in the prior month and closer to the BoC’s 2% inflation target.
– Core inflation measures also eased, with median and trim CPI metrics falling toward more manageable levels.
– BoC Governor Tiff Macklem has suggested that if current inflation trends continue, the bank could begin easing policy as early as the third quarter of 2024.
– Market pricing reflects an expectation of at least one rate cut by September, with the potential for two cuts by year-end.
### U.S. Federal Reserve
In contrast, the Federal Reserve remains in no rush to cut interest rates.
– Despite moderate softening in U.S. inflation, recent CPI prints still show core inflation near 3.5% annualized, keeping the Fed on a cautious footing.
– Labor market strength continues to support the Fed’s higher-for-longer stance, with unemployment hovering around 3.8% and Non-Farm Payrolls (NFP) outperforming economist expectations.
– Fed Chair Jerome Powell and other Fed officials have emphasized that more data is needed before cuts can be considered, suggesting that rate reductions may be delayed until late 2024 or even 2025.
– The result is a persistent yield differential favoring the U.S. Dollar, especially against currencies tied to more dovish central banks like the BoC.
## Canadian Economic Weakness Adds to Pressure on CAD
Beyond central bank expectations, the macroeconomic backdrop in Canada is raising concerns about economic resilience, adding to downward pressure on the loonie.
**Recent Canadian data highlights:**
– Q4 2023 GDP came in at just 0.2% annualized, well below expectations of 1.0%, signaling stagnation.
– Housing market volatility persists, with higher interest rates cooling real estate
Read more on USD/CAD trading.