The Canadian Dollar (CAD) has seen a resurgence for the third consecutive session, signaling a moderate weekly recovery following a notable decline over the past two weeks. Contributing factors to the Loonie’s rebound include a softer US Dollar amidst a lack of significant macroeconomic data and diminishing concerns surrounding the Middle East conflict.
Investor sentiment reflects an acceptance of the possibility that the Federal Reserve (Fed) will postpone and reduce its monetary easing plans, prompting some profit-taking on the US Dollar. Chicago Fed President Austen Goolsbee’s remarks on the stagnation of inflation in the United States had minimal impact on the greenback.
Additionally, reassurances from Iranian authorities downplaying rumors of a drone attack by Israel have alleviated immediate fears of escalating conflict, leading to a gradual reduction in risk aversion, which has bolstered the CAD.
In the realm of market movements, the Canadian Dollar has continued to appreciate, benefiting from a light US macroeconomic calendar and diminishing geopolitical tensions. The Iranian government’s dismissal of potential retaliation intentions has further contributed to market calmness.
Throughout the week, US economic data has reinforced signs of sustained growth alongside a tight labor market, reinforcing expectations that the US central bank may need to maintain rates at higher levels for an extended period.
Conversely, data from Canada reflects a softening trend in inflation, highlighting a divergence in monetary policy outlook between the Bank of Canada (BoC) and the Fed.
Expectations for a Fed rate cut in July have declined to 38%, down from approximately 50% at the beginning of the week, with investors pricing in a reduction of 40 basis points in 2024, a decrease from the 150 basis points forecasted in January.
In terms of currency performance this week, the Canadian Dollar saw modest gains against most major currencies, although it weakened against the Swiss Franc.
Technical analysis indicates the formation of a bearish Head & Shoulders pattern in the USD/CAD pair, with significant support identified at 1.3725. Below this level, further support is anticipated at 1.3665, with the target of the pattern coinciding with the 50% Fibonacci retracement of the April rally at 1.3620. Conversely, a breach above 1.3800 would redirect attention to the 1.3850 high, signaling a potential shift in focus.
