The USD/CAD currency pair is facing challenges as it encounters a slight pullback in the US dollar from a recent two-month peak. While there are expectations for a more moderate approach to monetary policy by the Federal Reserve, any significant declines in the US dollar are unlikely. Moreover, anticipations of a more considerable interest rate cut by the Bank of Canada, combined with declining crude oil prices, could offer additional support for the currency pair.
During the Asian trading session on Wednesday, the USD/CAD pair struggled to take advantage of a minor increase and remained below its recent high of approximately 1.3835 – 1.3840, recorded the previous day. Current trading rates hover around 1.3775, showing little change for the day. However, the underlying economic factors indicate the possibility of extending the strong rally observed over the last three weeks.
The recent retreat of the US dollar from its two-month high has posed challenges for the USD/CAD pair. Nonetheless, a significant decline for the dollar seems unlikely as market sentiments increasingly favor a reduction in the aggressiveness of the Fed’s policy. Expectations of a regular 25 basis point interest rate cut next month are influencing this outlook. Concurrently, the potential for a substantial 50 basis point rate cut by the Bank of Canada, driven by lower consumer inflation data, is likely to exert pressure on the Canadian dollar.
Recent data from Statistics Canada indicated a 0.4% decline in the Consumer Price Index for September, with the year-over-year rate reducing from 2.0% in August to 1.6%. This represents the lowest annual increase since February 2021, raising speculation for a larger rate cut by the Bank of Canada. Additionally, a declining trend in crude oil prices, fueled by reduced concerns about Middle East supply disruptions, could adversely affect the commodity-sensitive Canadian dollar, reinforcing a positive outlook for USD/CAD.
From a technical perspective, the Relative Strength Index has also relaxed from overbought levels, suggesting potential dip-buying opportunities. It may be wise for traders to hold off on making significant moves until stronger downward momentum is confirmed. Market participants are keenly awaiting upcoming Canadian economic data, including manufacturing sales and housing starts, as well as developments in US dollar and crude oil dynamics which should offer further direction for the currency pair.
