In early European trading hours on Monday, the USD/CAD pair remained under pressure, hovering near the 1.3685 mark. The Canadian Dollar (CAD) has seen a modest uptick, driven by an increase in crude oil prices, posing a challenge for the USD/CAD exchange rate.
Investor attention is focused on upcoming economic indicators from Canada, particularly the release of the Ivey Purchasing Managers Index (PMI) and employment data for April. These figures are expected to provide insights into the economic outlook and inflation trajectory of the Canadian economy. Additionally, market participants will closely monitor speeches from Federal Reserve officials Thomas Barkin and John Williams later in the day.
Recent disappointing data from the US labor market has fueled speculation that the Federal Reserve may consider interest rate cuts as early as September. The April job report showed a weaker-than-expected addition of 175,000 jobs, compared to market expectations of 243,000. Furthermore, the Unemployment Rate edged up from 3.8% to 3.9% in April, while Average Hourly Earnings declined to 3.9% year-over-year from the previous reading of 4.1%. Additionally, the ISM Services PMI dropped to 49.4 in April, signaling contraction and falling short of market projections.
In response, the US Dollar encountered selling pressure as investors priced in increased odds of multiple rate cuts by the Fed this year. According to the CME Fedwatch tool, financial markets have priced in approximately 68% likelihood of a rate cut in September.
On the Canadian front, Bank of Canada (BoC) Governor Tiff Macklem expressed confidence in the inflation trajectory, hinting at potential easing of borrowing costs in the near future. However, Macklem tempered expectations by emphasizing a cautious approach to rate cuts.
Market sentiment suggests anticipation of a potential monetary policy easing by the BoC at its upcoming meeting in June, according to Refinitiv data. Should the Canadian central bank move to lower interest rates before the Fed, it could exert downward pressure on the Canadian Dollar and limit the downside for the USD/CAD pair. Moreover, the recovery in oil prices has bolstered the commodity-linked Loonie, supported by Canada’s status as a leading oil exporter to the United States.
