USD/CAD pressured as Fed Waller's dovish stance impacts US Dollar
- Loonie edges lower as yields fall despite upbeat US data.
- USD/CAD pressured by Fed's Waller calls for a July rate cut.
- USD/CAD dips below the 50-day SMA, bringing the 20-day SMA into play.
The Canadian Dollar (CAD) is trading higher against the US Dollar (USD) on Friday as markets focus on dovish comments from Fed Governor Waller.
At the time of writing, USD/CAD is trading above 1.3720, posting a modest decline of 0.20%.
USD/CAD pressured as Waller calls for July rate cut, Fed uncertainty weighs on the US Dollar
Federal Reserve Governor Christopher Waller is calling for the Fed to adopt a more accommodative stance at the next FOMC meeting. In an interview with Bloomberg on Friday, Waller stated, “It makes sense to cut the FOMC’s policy rate by 25 basis points two weeks from now.” He continued to explain that the private sector employment data has been showing clear signs of slowing and that inflation risks arising from tariffs will likely be temporary.
Despite the Housing Starts and Building Permit data released on Friday which reflected a strong rebound in the real-estate market in June, an increase in Fed rate cuts for the September meeting have placed pressure on USD/CAD.
Meanwhile, the University of Michigan (UoM) released the first set of preliminary Sentiment data for July, which rose to 61.8, from 60.7 in June and higher than the estimate of 61.5. This reflects an increase in consumer confidence in the US.
At the same time, the UoM 1-year inflation expectations for July fell to 4.4% from 5% while the 5-year inflation expectations also came in softer at 3.6%, declining from 4% the previous month.
Although recent data this week reflects a resilient US economy, which has led to expectations that the Fed may maintain rates within the 4.25%-4.50% range for longer, Waller's comments have pushed yields lower. Additionally, political uncertainty over the future of Fed Chair Jerome Powell and the lack of progress in trade talks prior to the August deadline may continue to limit the US Dollar's strength.
With traders continuing to monitor Fed expectations and trade tensions closely, a temporary pullback in the Greenback on Friday has provided some relief for the Loonie pair.
USD/CAD dips below the 50-day SMA, bringing the 20-day SMA into play
The USD/CAD daily chart reflects a market in consolidation after a prolonged downtrend, with price action currently hovering near the 78.6% Fibonacci retracement level of the September-February rally at 1.3714.
The pair is trading slightly above the 20-day Simple Moving Average (SMA) at 1.3674, indicating modest short-term support, while the 50-day SMA at 1.3733 acts as immediate resistance.
USD/CAD daily chart
The Relative Strength Index (RSI) sits at 51, indicating a neutral stance, which suggests a lack of strong directional momentum.
Key resistance lies at the June high of 1.3798, with a clear break of the 1.3900 psychological level opening the door for the May high at 1.3823.
On the downside, support is seen at the psychological support level of 1.3600 with the June low at 1.3540. A more significant move could see bears regain control and push the price toward the September 2024 low at 1.34196. Overall, the technical outlook remains cautiously neutral, with the potential for upside if key resistance levels are broken.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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