**Canadian Dollar Outlook: USD/CAD Breaks to Fresh Cycle Highs**
*Adapted and expanded from a ForexFactory article by James Stanley*
The USD/CAD currency pair has recently surged to new cycle highs, signaling a potential opportunity for bullish price continuation. This rise reflects a confluence of macroeconomic forces impacting both the U.S. dollar and the Canadian dollar, with implications for forex traders, investors, and policymakers.
In recent sessions, USD/CAD has not only held elevated levels but has decisively broken through resistance zones that previously capped upside momentum. Traders seeking insight into why this breakout has occurred, and what might lie ahead, need to examine multiple macroeconomic drivers—chief among them divergence in monetary policy between the U.S. Federal Reserve and the Bank of Canada, commodity price movement, and inflation developments.
## USD/CAD Technical Breakout
– The USD/CAD pair has climbed aggressively, moving above the 1.3700 level and then past resistance near the 1.3800 handle.
– The pair reached its highest level since November 2023, breaking above a long-term consolidation zone that had formed over several months.
– The bullish momentum was underscored by a strong breakout candlestick, followed by sustained closes above previous resistance, suggesting the potential for trend continuation.
– Technical analysts now eye 1.3900 and 1.3975 as key near-term resistance levels.
– Support in the pair lies around 1.3665 and 1.3600, with the breakout zone near 1.3780 now acting as near-term support.
These levels will remain pivotal as market participants assess whether recent gains can solidify into a longer-term uptrend.
## Diverging Monetary Policy: Fed vs. Bank of Canada
The primary macroeconomic catalyst behind USD/CAD’s breakout is the sharp divergence in expected monetary policy between the U.S. Federal Reserve and the Bank of Canada.
### U.S. Federal Reserve
– Despite some market expectations that the Fed would begin cutting rates in early 2024, persistent inflation and stronger-than-expected economic data have tempered those forecasts.
– Fed Chair Jerome Powell has repeatedly emphasized a data-dependent approach, suggesting patience before making any policy shifts.
– Recent statements from Fed officials have tilted hawkish, reflecting concern about inflation remaining above the central bank’s 2 percent target.
– U.S. Treasury yields have reflected this hawkish stance, with the 10-year yield holding above 4.5 percent.
– Sticky inflation data, such as the April 2024 Core CPI reading of 0.3 percent month-over-month, has further challenged the case for early rate cuts.
The dollar has responded favorably to the hawkish Fed outlook, strengthening across the board and triggering bullish momentum in USD pairs, including USD/CAD.
### Bank of Canada (BoC)
– In contrast, the Bank of Canada appears more inclined to ease policy sooner rather than later.
– Deputy Governor Toni Gravelle recently indicated that rate cuts could be on the horizon, as domestic demand slows and inflation continues to moderate.
– Canada’s headline inflation cooled to 2.7 percent in March 2024, relatively close to the BoC’s 2 percent target.
– Labor market data suggest softening: Employment gains have slowed and wage growth is decelerating.
– As a result, Canadian bond yields have dropped, and money markets now price in multiple rate cuts by the end of 2024.
This policy divergence—one central bank leaning hawkish, the other potentially cutting rates—has widened yield differentials and driven capital flows into the higher-yielding U.S. dollar, pressuring the Canadian dollar lower.
## Crude Oil Prices No Longer Supporting CAD
The Canadian dollar is often seen as a “petro-currency” due to Canada’s status as a major crude oil exporter. Typically, rising oil prices lend support to the CAD. However, this relationship has weakened recently.
– West Texas Intermediate
Read more on USD/CAD trading.