The US Dollar is showing signs of a rebound after experiencing a selloff on Friday. Investors are preparing for the upcoming holiday season, which has contributed to the strengthening of the USD. This recovery comes after a period of decline, with the USD/CAD set to record its fifth weekly decline in six consecutive weeks.
In contrast to the USD’s struggles, the Canadian Dollar briefly rallied to a fresh 19-week high. This surge can be attributed to rate-hungry markets, which have put pressure on the USD. However, despite this temporary boost, the Canadian Dollar is still facing challenges as economic data from Canada indicates a potential economic slowdown.
Continued rate cuts from the Federal Reserve (Fed)
The USD/CAD experienced a sharp decline, reaching a 19-week low on Friday. This drop came as markets continue to factor in an accelerated pace of rate cuts from the Federal Reserve in 2024. The US inflation rate has been easing at a faster rate than initially expected, prompting speculations of more frequent rate cuts from the Fed.
Economic data from Canada indicates an economic slowdown
The Canadian Dollar is struggling to find support due to disappointing economic data from Canada. The monthly Gross Domestic Product (GDP) failed to register any growth for the fourth consecutive reporting period in October. This follows a downward revision of September’s GDP, which saw a meager 0.1% growth revised to no growth at all. Since June, Canadian GDP has failed to show any significant improvement.
US inflation continues to decline
The US Personal Consumption Expenditures (PCE) Price Index reveals a decline in inflation, contrary to market forecasts. The rate of inflation is draining away faster than economic models initially predicted. This has led to an increase in money market bets on faster and more frequent rate hikes from the Federal Reserve in 2024.
With US inflation steadily declining, investor expectations regarding Fed rate cuts for next year have significantly increased. Market expectations currently exceed the Fed’s own rate outlook, with money markets pricing in over 160 basis points in rate cuts through 2024. In contrast, the Fed’s dot plot of rate forecasts only indicates 75 basis points by the end of next December.
Despite the late-Friday rally, the USD/CAD has returned to neutral territory. The pair has managed to claw back to the 1.3300 handle as market volatility increases towards the end of the week. However, the USD/CAD remains down for the week, with an 0.8% decrease from Monday’s opening bids and a 2.5% decline from the last swing high into 1.3620.
Technical indicators and challenges ahead
The USD/CAD’s intraday action indicates a need for further recovery before the pair can challenge topside momentum beyond the 200-hour Simple Moving Average (SMA) near 1.3400. Additionally, technical indicators currently point towards oversold territory, further complicating near-term recoveries.
The US Dollar is experiencing a rebound from Friday’s selloff as investors prepare for the holiday season. However, the Loonie’s temporary rally to a fresh 19-week high highlights the challenges faced by the Canadian Dollar due to an economic slowdown. With US inflation continuing to decline, market expectations of accelerated rate cuts from the Federal Reserve have risen. The USD/CAD’s retracement and technical indicators suggest further challenges ahead for the pair in the near term.