**USD/CAD Slips to Five-Month Lows as Fed Rate Cut Bets Grow**
*By FXStreet (original article by Vicky Parnell) with expanded analysis and additional data*
The US dollar slid to its lowest level in five months against the Canadian dollar on Monday, as increasing speculation that the Federal Reserve will begin cutting interest rates early next year continues to weigh on the greenback. Amid declining US Treasury yields and upbeat economic indicators from Canada, the USD/CAD pair dropped below the key 1.3700 level, marking a significant shift in market sentiment as 2024 approaches.
This downward movement in USD/CAD reflects a broader trend in the foreign exchange market where investors are reevaluating their positions on the US dollar amid signs of easing inflation and a potential pivot from the Federal Reserve. This dynamic, coupled with firming expectations for policy tightening by the Bank of Canada (BoC), is influencing the pair’s trajectory.
Below is a detailed breakdown of the factors behind the USD/CAD drop, current market trends, and what traders and investors might expect in the near future.
## Key Reasons Behind USD/CAD Decline
### 1. **Expectations of Fed Rate Cuts in 2024**
– Market confidence is growing that the Federal Reserve could start cutting rates as early as March 2024.
– According to CME Group’s FedWatch Tool, futures pricing shows traders are assigning a probability of more than 75 percent for a rate cut by the March meeting.
– Analysts expect between three and six rate cuts in 2024, assuming inflation trends continue to cool and economic growth slows.
– Dovish comments from Fed officials and soft inflation data from recent months have reinforced this outlook.
– With US interest rates seen peaking, the dollar’s yield advantage is eroding, causing downward pressure on USD-based currency pairs.
### 2. **Falling US Treasury Yields**
– US 10-year Treasury yields have declined substantially since peaking above 5.00 percent in October 2023.
– The yield curve has flattened, with the 2-year and 10-year yields both retreating rapidly in recent weeks.
– This fall in yields reflects the market’s expectations of a looser monetary policy stance in 2024.
– Lower yields reduce demand for US-denominated assets, which can cause the dollar to weaken relative to other currencies like the Canadian dollar.
### 3. **Stronger Canadian Dollar Amid Firm Oil Prices**
– The Canadian dollar, commonly known as the “loonie”, is partly supported by stable demand for crude oil, a significant export for Canada.
– Oil prices have been bolstered by:
– Ongoing OPEC+ supply cuts
– Seasonal winter demand for heating oil
– Geopolitical risks, including tension in the Middle East and Red Sea shipping disruptions
– When oil prices rise, the loonie typically benefits due to Canada’s role as a major oil exporter.
– At the same time, Canada’s economy has shown resilience with recent gains in employment and housing starts, further strengthening the currency.
## USD/CAD Technical Analysis
The USD/CAD pair broke below a crucial support level at 1.3700, a floor that had held for months. This move was driven by technical indicators aligning with fundamental bearish drivers.
### Key Technical Observations:
– The pair dropped as low as 1.3660 in the Asian session on Monday, December 25, 2023.
– It confirmed a bearish head-and-shoulders pattern on the daily chart, targeting a medium-term move toward 1.3500.
– The Relative Strength Index (RSI) on the daily chart remains below 50, supporting bearish momentum.
– The 50-day and 100-day moving averages are reversing from recent crossovers, which could further weigh on near-term price action.
– Immediate support lies at 1.3660, followed by 1.3600 and then
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