Canadian Dollar declines amid Fed easing expectations

The Canadian dollar has experienced a 1.23% retreat this week, marking its worst weekly performance in almost a year. The US Dollar is rallying, driven by higher US yields and the reassessment of the timing and size of the US Fed’s easing cycle.

The Michigan Consumer Sentiment Index deteriorated beyond expectations, but Consumer Inflation Expectations have increased. The European Central Bank’s dovish monetary policy statement has provided additional support for the US Dollar.

Boston Fed President Susan Collins anticipated a delay on the monetary easing kick-off, hinting at September and pointing to just two cuts in 2024. The Canadian Dollar continues to head south, with a 1.25% sell-off this week, its worst weekly performance since May 2023. US 10-year yields have pulled back from highs, but remain above the key 4.5% level. Investors have trimmed their Fed easing expectations to 60 basis points in 2024, with the first rate cut expected only in September.

Chicago Fed President Austan Goldsbee affirms that the bank might have more to do to tame inflation and that the trade-off between prices and employment will be heightened in 2024. Fed’s Bostic and Daly, all in the hawkish side of the committee, might provide further support for the USD.

The US Dollar is under strong bullish momentum, with the reverse trendline providing support and the USD/CAD pair at overbought levels but not at extremes.