USD/CAD posts modest gains above 1.3800 as BoC signals possible cuts ahead
- USD/CAD trades with mild gains around 1.3830 in Thursday’s early Asian session.
- Fed kept its key benchmark rate unchanged at the July policy meeting.
- The Bank of Canada holds the interest rate at 2.75%, as widely expected.
The USD/CAD pair posts modest gains near 1.3830 during the Asian trading hours on Thursday. The US Dollar (USD) edges higher against the Canadian Dollar (CAD) after the Federal Reserve (Fed) left US interest rates unchanged and signaled the US central bank isn’t ready to cut rates.
The Fed decided to hold its benchmark federal funds rate in a range of 4.25%-4.5% at its July meeting on Wednesday, as widely expected. Fed Chair Jerome Powell stated after the policy meeting that the US central bank has “made no decisions” about a potential policy change in September, and it may take a bit to assess the effect of tariffs on consumer prices.
Additionally, stronger-than-expected US economic data contribute to the Greenback’s upside. Data released by the US Bureau of Economic Analysis on Wednesday showed that the US Gross Domestic Product (GDP) expanded at an annual rate of 3.0% for the April through June period. This figure followed the 0.5% contraction in the first quarter and came in stronger than the expectation of 2.4%.
On the Loonie front, the Bank of Canada (BoC) left its interest rate unchanged at 2.75% on Wednesday, citing resilience in the economy despite the ongoing global trade war brought on by the US. BoC Governor Tiff Macklem delivered dovish comments, saying that the door is still open to lowering rates in the future if necessary. This might weigh on the CAD and create a tailwind for the pair in the near term.
The attention will shift to the US employment report for July, which will be released later on Friday. The US economy is expected to add 110K jobs in July, while the Unemployment Rate is projected to rise to 4.2% from 4.1% during the same period. The better-than-expected Nonfarm Payrolls (NFP) print could lift the Greenback.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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