The USD/CAD pair continues its downward trajectory, trading near 1.3770 during the Asian hours on Thursday, marking the third consecutive session of losses. The US Dollar (USD) faces mounting pressure amid increasing concerns regarding the Federal Reserve’s (Fed) independence, following the controversial removal of Fed Governor Lisa Cook by President Donald Trump. The ongoing uncertainty around Fed policy has led traders to adjust expectations for potential rate cuts.
Technical Overview
- Resistance: The first key resistance level for USD/CAD is the 1.3850 range, followed by the 1.3900 area.
- Support: Immediate support lies at 1.3750, with the next significant support around the 1.3700 level.
Fundamental Insights
- Concerns Over Fed Independence: The abrupt firing of Fed Governor Lisa Cook has stirred uncertainty in financial markets. President Trump’s actions have raised doubts over the central bank’s ability to function independently, with the potential for more significant interest rate cuts, boosting the likelihood of USD weakening.
- Rising Odds of Rate Cuts: Market participants are now pricing in over an 88% chance of a 25 basis point rate cut by the Fed in its upcoming September meeting, compared to 82% the previous week, according to the CME FedWatch Tool. A dovish Fed stance could continue to undermine the strength of the USD.
- US GDP Data Awaited: Investors are eagerly awaiting the Q2 US Gross Domestic Product (GDP) annualized data, which is expected to influence the market’s outlook on US economic health and potentially affect the USD’s performance.
Bank of Canada (BoC) Stance on Inflation:
- BoC’s Focus on 2% Inflation Target: Bank of Canada (BoC) Governor Tiff Macklem reaffirmed the central bank’s commitment to maintaining the 2% inflation target. Despite the challenges presented by shifting US tariffs and the global supply chain issues, Macklem noted that the BoC’s monetary policy remains focused on inflation control. The central bank will continue its cautious approach, balancing economic risks with inflation management.
China-Canada Trade Relations:
- Constructive Talks with China: On the trade front, China’s top trade negotiator, Li Chenggang, confirmed constructive exchanges with Canada regarding their bilateral economic and trade relations. The two nations are set to engage further in pragmatic talks to manage differences and foster stronger trade ties, which could also provide a stabilizing effect on the Canadian Dollar (CAD).
Outlook:
- Bearish USD/CAD Scenario: If the uncertainty surrounding the US Federal Reserve continues to erode confidence in the US Dollar, the pair could continue to slide toward the 1.3750 level and possibly breach it in the near term.
- Bullish USD/CAD Scenario: On the other hand, should the US economy surprise positively with strong GDP data and Fed officials provide more dovish signals, the USD may regain some strength, potentially pushing the pair back toward higher levels.
As we move forward, the US Dollar’s trajectory will largely depend on the Fed’s monetary policy direction, while the Canadian Dollar remains buoyed by stable economic signals and the BoC’s commitment to inflation control.
For traders, USD/CAD’s current bearish trend highlights the importance of monitoring Fed-related developments closely, with market volatility likely to continue in the coming days.
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