USD to CAD Price Forecast: Lower Fed Rate Hike Expectations Weigh on Greenback

Highlights

• USD to CAD attempting recovery after reaching year-low.
• Interest rate differential between BoC and Fed influences decline.
• Positive inflation data but recession concerns persist.

Overview

The USD to CAD is attempting to stage a recovery after hitting its lowest level in almost a year. This week’s sharp decline can be attributed to a shift in the interest rate differential between the Bank of Canada (BoC) and the U.S. Federal Reserve. While the BoC raised its benchmark rate by 25 basis points, traders revised down their expectations for further rate hikes by the Fed. This adjustment in the spread between Canadian and U.S. debt has increased the appeal of the Canadian dollar, known as the Loonie, over its U.S. counterpart.

Softer Inflation Weakens Yields, US Dollar

One factor contributing to this sentiment is softer U.S. inflation data, which suggests that the Federal Reserve may be nearing the end of its rate hike cycle. In June, U.S. producer prices experienced minimal growth, resulting in the smallest annual increase in nearly three years. These figures follow modest consumer price rises from the previous month. Investors view these lower inflation numbers positively, as they support the idea of a smooth landing for the U.S. economy, especially when combined with a resilient labor market.

July Rate Hike then Pause?

Despite the favorable inflation data, there is still a belief that the US will face a recession later this year due to the impact of previous and potential future interest rate hikes. Currently, markets are pricing in a 95% probability of a 25 basis point rate increase by the Fed this month, as indicated by CME’s FedWatch tool. However, expectations for additional hikes throughout the year remain subdued.

BoC Raises Rates

Earlier this week, the BoC raised its key overnight rate by a quarter of a percentage point to reach a 22-year high of 5.0%. The move, which marked the second consecutive monthly rate hike, was widely anticipated by analysts and the market. The BoC emphasized the risk of inflation surpassing its 2% target as a reason for considering further rate increases. While the central bank acknowledged the potential need for more action, it aims to strike a balance by not implementing more restrictive measures than necessary. The BoC will closely monitor incoming data and the inflation outlook to guide its future policy decisions.

Short-Term Outlook:  More Weakness Expected

In summary, the USD to CAD exchange rate is attempting a rebound after reaching its lowest level in almost a year. The recent sell-off was triggered by changes in the interest rate differential between the Bank of Canada and the U.S. Federal Reserve. Softer U.S. inflation data and the possibility of a soft landing for the U.S. economy have been received positively by investors. However, concerns about a forthcoming recession persist due to past and potential future interest rate hikes. The BoC recently raised its key overnight rate, citing inflationary risks, but will closely assess incoming data before determining its next move.

Technical Analysis

The USD to CAD is currently exhibiting bearish sentiment. With the current 4-hour price at 1.3129, slightly higher than the previous close of 1.3116, there is a small upward movement. However, the price remains below both the 200-4H and 50-4H moving averages, indicating a bearish trend. The 14-4H RSI stands at 33.73, suggesting a bearish reading.

The USD to CAD is currently straddling the lower end of the support zone at 1.3118 as it tries to rebuild a bottom. Based on these factors, the market sentiment leans towards bearishness.