During the European session on Friday, the USD/CAD pair hovered around 1.3720, halting its four-day winning streak. Earlier in the Asian market, the US Dollar (USD) made gains against the Canadian Dollar (CAD) as risk aversion sentiment emerged. This shift can be attributed to higher-than-expected Purchasing Managers Index (PMI) data released from the United States (US) on Thursday, reinforcing a hawkish sentiment surrounding the Federal Reserve (Fed) regarding maintaining higher policy rates for an extended period.
The S&P Global US Composite PMI for May rose to 54.4 from April’s 51.3, surpassing market expectations of 51.1 and marking the highest level since April 2022. The Service PMI surged to 54.8, indicating significant output growth, while the Manufacturing PMI increased to 50.9.
Furthermore, the recent Federal Open Market Committee (FOMC) Minutes indicated Fed policymakers’ concerns about persistent inflation levels, which have not improved as quickly as initially anticipated in 2024. Federal Reserve Bank of Atlanta President Raphael Bostic expressed on Thursday that the inflation outlook might not see swift improvement, contrary to market expectations.
On the CAD front, declining crude oil prices have been exerting downward pressure on the commodity-linked Canadian Dollar (CAD), given Canada’s status as the largest oil exporter to the United States. West Texas Intermediate (WTI) Oil prices have experienced a five-day consecutive decline, trading around $77.80 per barrel.
The higher-than-expected US PMI data and hawkish comments from Federal Reserve officials suggest a potential delay in Fed rate cuts. This scenario, coupled with the anticipation of the Bank of Canada (BoC) potentially cutting interest rates before the US Federal Reserve, could weigh on the Canadian Dollar, thus supporting the USD/CAD pair.
Investors are awaiting Retail Sales data from Canada and US Durable Goods Orders, along with the Michigan Consumer Sentiment Index from the United States, for further insights into economic conditions in both countries.
