USD to CAD Price Forecast: Stable Amidst Fed, BOC Rate-Hike Expectations

Highlights

1. USD to CAD finding stability despite expectations of a Fed rate-hike pause.
2. Comparison between US Federal Reserve and Bank of Canada’s hawkishness.
3. Disappointing US retail sales and slower Canadian inflation data affecting the currency pair.

Overview

The USD to CAD is finding some stability on Wednesday after a sharp decline in the previous session. Despite market expectations of a potential pause in the US Federal Reserve’s rate-hike cycle, the US Dollar surprisingly displayed strength.

Primary Driver:  Fed, BOC Rate Hike Expectations

Although a 25 basis-point rate hike is widely expected during the Fed’s upcoming meeting, experts believe it could be the final increase in the current tightening cycle. However, the central bank is likely to maintain its hawkish stance, challenging those who anticipate a weaker US Dollar. The focus now turns to a comparison between the US Federal Reserve and the Bank of Canada to determine which central bank will adopt a more hawkish approach.

USD Weakens on Disappointing Retail Sales Data

Tuesday’s downward price movement was primarily driven by disappointing US retail sales data for June, which fell short of economists’ forecasts. Despite this, consumer spending remained resilient.

Consequently, the USD to CAD exchange rate flirted with a 10-month low, coinciding with a decline in benchmark Treasury yields for the second consecutive day. However, the market regained stability when Canadian consumer inflation data revealed slower growth than expected. This outcome suggests a potential pause in the Bank of Canada’s rate hike, which policymakers had indicated would be data-dependent following a recent increase.

Canada’s Annual Inflation Inside BOC’s Range

Statistics Canada reported that Canada’s annual inflation rate dropped more than anticipated in June, largely due to lower energy prices. The Bank of Canada’s preferred measures of core inflation, which exclude specific categories, indicate relatively stable underlying price pressures. Excluding food and energy, prices rose by 3.5% compared to a 4.0% gain in May.

Although inflation is moving in the right direction, it has not yet reached the bank’s 2% target, necessitating further efforts. The central bank expects inflation to hover around 3% over the next year before gradually declining to the 2% target by mid-2025, slightly later than previously anticipated.

In response to the inflation data, money markets adjusted their expectations for a rate hike at the Bank of Canada’s next meeting, reducing the probability from 25% to 20% for December.

Short-Term Outlook:  Fed Dependent

In summary, the USD to CAD exchange rate is navigating a complex landscape influenced by the US Federal Reserve’s rate-hike cycle, retail sales data, and Canadian consumer inflation. These variables will shape the short-term outlook for the currency pair, generating anticipation among traders eager to decipher forthcoming market movements.

Technical Analysis

The USD to CAD market sentiment is leaning towards a bearish outlook based on our analysis. With the current 4-hour price slightly lower than the previous close, it indicates a potential resumption of the dominant downward trend. The price is trading below both the 200-4H and 50-4H moving averages, suggesting a bearish bias. The 14-4H RSI reading of 43.54 indicates weaker momentum.

The USD to CAD is currently above the main support area, putting the Forex pair in a position to challenge this zone for a second time in a week. Overall, traders should be cautious as the market approaches support with the RSI nearing oversold territory