USD/CAD Rises as the Fed Moves Away from Rate Cuts & the BoC Comes Closer

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USD/CAD Analysis

The Fed has been getting more cautious around removing monetary restraint since the economy outperforms, the labor market is robust and price pressures are persistent. Yesterday's data showed that CPI accelerated by 3.5% in March and the fastest pace in half a year. Stubborn inflation raises the bar for a Fed pivot and markets have now priced out a summer cut. Based on CME's FedWatch Tool, the first cut is pushed back to September and it could be the only one for the year. [1]

The hot CPI report and the immediate hawkish repricing around the Fed's path, send the greenback higher against its major counterparts. Most notably, it hit new 34-year highs against the Yen, while USD/CAD jumped to 2024 highs.

On the same day, the Bank of Canada maintained rates at 5.5% but appeared less worried around inflation and lowered the 2024 CPI projections [2]. Adding to the dovish tilt, Governor Macklem opened the door to a June cut, saying that such outcome is "within the realm of possibilities" [3]. There is a stark shift in monetary policy dynamics as the BoC come closer to a cut, whereas its US counterpart moves away from such move.

This creates downside risk for the Canadian Dollar and could generate further strength for USD/CAD, although it may not yet be ready to tackle the 2022 highs (1.3978). On the other hand, the BoC did not clearly endorse a June pivot and the Fed is still expected to lower rates this year. Furthermore, the advance looks stretched and a test of the EMA200 (around 1.3550) would be reasonable. However strong catalyst would be needed for daily closes below it that would pause the bullish bias and the downside appears well protected.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 11 Apr 2024 https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

2

Retrieved 11 Apr 2024 https://www.bankofcanada.ca/2024/04/fad-press-release-2024-04-10/

3

Retrieved 15 May 2024 https://www.youtube.com/watch

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