USDCAD is moving in box pattern and market has rebounded from the support area of the pattern
USD/CAD Depreciates as Fed Rate Cuts Loom
Fed’s Potential Rate Cut and Its Impact on USD/CAD
The USD/CAD pair has been under pressure recently, largely due to growing expectations that the Federal Reserve (Fed) will cut interest rates in September. Fed Governor Christopher Waller hinted that the central bank is ‘getting closer’ to a rate cut, adding to the market speculation. Meanwhile, Richmond Fed President Thomas Barkin noted that inflation has started to ease more broadly, supporting the case for a rate cut.
According to the CME Group’s FedWatch Tool, the probability of a 25-basis point rate cut at the Fed’s September meeting has surged to 93.5%, up significantly from 69.7% just a week earlier. This anticipation of a rate cut has led to a depreciation of the USD/CAD pair, with the pair trading around 1.3670 during the European session on Thursday.
The Role of Crude Oil Prices in USD/CAD Movements
Another factor influencing the USD/CAD pair is the movement of crude oil prices. Canada is a major exporter of oil to the United States, and fluctuations in oil prices can have a significant impact on the Canadian Dollar (CAD). Recently, the price of West Texas Intermediate (WTI) crude oil has been trading around $81.30 per barrel.
While lower crude oil prices typically limit the upside for the CAD, recent data from the US Energy Information Administration (EIA) provided some support for oil prices. The EIA reported a significant decline in US crude oil stocks, with a decrease of 4.87 million barrels for the week ending July 12, far exceeding the expected drop of 0.80 million barrels. This larger-than-expected decline in crude stocks helped WTI prices gain some ground during Thursday’s Asian session.
Canadian Inflation and Bank of Canada’s Rate Decisions
In addition to factors influencing the USD, the CAD is also affected by domestic economic conditions and the policies of the Bank of Canada (BoC). Recent softer inflation readings in Canada have led to increased expectations that the BoC might cut interest rates further. Lower interest rates generally make a currency less attractive to investors, potentially capping any upside for the CAD.
The combination of potential rate cuts by both the Fed and the BoC adds a layer of complexity to the USD/CAD pair’s movements. While the Fed’s dovish stance puts downward pressure on the USD, any similar moves by the BoC could mitigate some of the CAD’s gains.
US Treasury Yields and Market Sentiment
Despite the dovish sentiment surrounding the Fed, US Treasury yields have improved due to increased risk aversion among investors. Higher Treasury yields typically support the USD, as they offer higher returns to investors. As of now, 2-year and 10-year US Treasury bonds yield 4.45% and 4.17%, respectively.
USDCAD is moving in box pattern and market has fallen from the resistance area of the pattern
This increase in yields has put some pressure on oil prices, which in turn affects the CAD. The interplay between Treasury yields, oil prices, and interest rate expectations creates a dynamic and often unpredictable environment for the USD/CAD pair.
The Bigger Picture: Global Economic Factors
The movements of the USD/CAD pair are not just influenced by domestic factors but also by broader global economic trends. For instance, changes in global oil supply and demand, geopolitical events, and shifts in investor sentiment all play a role in determining the value of the pair.
For example, any significant geopolitical events in major oil-producing regions can lead to volatility in oil prices, which would subsequently impact the CAD. Similarly, changes in global economic growth prospects can affect investor risk appetite, influencing the demand for safe-haven assets like the USD.
Final Summary
The USD/CAD pair’s recent depreciation is primarily driven by expectations of a Federal Reserve rate cut in September. Fed Governor Christopher Waller’s comments have fueled speculation, leading to a significant shift in market sentiment. Concurrently, movements in crude oil prices and softer Canadian inflation readings have influenced the CAD, adding to the complexity of the pair’s dynamics. Additionally, improved US Treasury yields due to increased risk aversion have added another layer of influence on the USD/CAD pair.
In this environment, traders and investors must stay attuned to economic data releases and central bank communications. Understanding the interplay between these various factors is key to navigating the forex market and making informed trading decisions.
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