The USD/CAD pair has reversed its recent losses and is trading higher near 1.4410 during the Asian session on Friday, edging closer to 1.4467, a level not seen since March 2020. This upward movement is driven by a combination of strong US economic data and a firmer US Dollar, while the Canadian Dollar (CAD) faces several challenges, including expectations for rate cuts from the Bank of Canada (BoC) and declining crude oil prices.
US Dollar Strength: Economic Data and Fed Policy
The US Dollar (USD) remains strong, bolstered by favorable economic data. The US Gross Domestic Product (GDP) for the third quarter came in at 3.1%, surpassing both market expectations and the previous reading of 2.8%. This robust economic performance supports the USD, particularly against currencies like the CAD, which are more sensitive to commodity prices.
Additionally, US Initial Jobless Claims dropped to 220,000 for the week ending December 13, down from 242,000 the previous week and below the market forecast of 230,000. This reflects continued strength in the labor market, which reinforces the Federal Reserve’s cautious stance on rate cuts.
Fed Chair Jerome Powell’s comments about inflation remaining above the 2% target and the central bank‘s focus on exercising caution in future rate cuts have further strengthened the USD. The Fed’s approach contrasts with other central banks, such as the Bank of Canada, which faces its own set of economic challenges.
Canadian Dollar (CAD) Struggles with Oil Price Decline and Rate Cut Expectations
The Canadian Dollar (CAD) faces pressure from multiple fronts. Expectations are growing that the Bank of Canada (BoC) will implement further rate cuts in 2025, although these cuts are expected to be more measured compared to the aggressive rate cuts seen in 2023. This dovish outlook for the BoC adds downside pressure to the CAD.
Additionally, the Canadian Dollar is heavily influenced by commodity prices, especially crude oil, as Canada is one of the largest oil exporters to the United States. The recent decline in crude oil prices has added to the CAD’s weakness, diminishing the currency’s appeal.
Upcoming Data: Retail Sales and Inflation Data
Traders will be watching Canadian data closely, particularly the October Retail Sales report, which will provide insight into the health of consumer spending in Canada. Any signs of weakness in retail sales could add to the CAD’s underperformance.
In the US, attention will shift to the Personal Consumption Expenditures (PCE) inflation report, which is the Fed’s preferred gauge of inflation. Additionally, the Michigan Consumer Sentiment Index will be released, offering insight into consumer confidence. Both reports could influence market expectations for future Fed policy and further impact USD/CAD price action.
Technical Outlook for USD/CAD
The USD/CAD pair has recently made a significant move higher and is testing key resistance levels around 1.4467. If the pair can break above this level, it could open the door for further gains towards the psychological 1.4500 mark. On the downside, support is seen around 1.4300, with a deeper retracement potentially targeting the 1.4200 region.
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