USD/CAD forecast: Currency Pair of the Week – June 3, 2024

The US dollar was a little stronger against most major currencies except the yen during the early European trade. It will be a busy week for the greenback with lots of top-tier data releases to come, starting with the ISM manufacturing PMI on Monday. Currency pairs like the EUR/USD and USD/CAD will be quite volatile thanks to additional risk events concerning the Eurozone and Canada, where both central banks are expected to cut interest rates by 25 basis points each. The EUR/USD and USD/CAD forecast are therefore subject to change this week, which could set the trend for days if not weeks to come.

USD/CAD forecast: BOC seen cutting rates by 25 basis points

The USD/CAD remained above the key 1.3600 handle ahead of this week’s key US data releases and Bank of Canada’s policy decision on Wednesday. The BOC’s rate will be on Wednesday, June 5. The central bank last raised interest rates to the current 5% in July last year. But could it finally start cutting rates again?

Last month, we have seen an overall mixed bag of Canadian macro data. The employment data was quite strong with a net 90K job creation reported for April, while retail sales were surprisingly weak with a month-over-month print of -0.6% compared to a 0.3%r rise expected. Meanwhile, all measures of CPI were below forecast, which is what matters the most.

The BOC is expected to loosen its policy to 4.75% at this meeting, according to three-quarters of economists in a Reuters poll. The same poll showed three further cuts this year, with the last one being a coin flip.

Given that there is some uncertainty over a potential rate cut at this meeting, we could well see a sharp move in CAD on the back of the decision on Wednesday. Uncertainty arises from the fact that the BOC may not want to diverge from the Fed, with the US central bank expected to wait until at least September before potentially cutting. Equally, with Canada’s CPI running within the bank’s 1%-3% target for a few months, it probably cannot justify delaying the cut.

USD/CAD forecast: US dollar faces key test with top tier data releases

This week, we will have plenty of US macro data to look forward to, including the latest ISM manufacturing PMI data today. The ISM survey from the services sectors, as well as JOLTS Job Openings, ADP private payrolls and jobless claims data will come out later in the week. But the key highlight is on Friday, June 7, when the May jobs report is published.

Here’s the full list of key data releases to watch on the economic data calendar this week:

The Fed has indicated it is willing to wait until the summer ends before potentially cutting interest rates. This jobs report and wages data should provide further clues on that front. In recent weeks, we have seen bond yields rise, with investors growing increasingly worried about the possibility of interest rates staying elevated for a longer period. If that sentiment changes, say because of a run of below-forecast US data, then the US dollar may finally break down more decisively and start a clean trend. 

USD/CAD technical analysis

Source: TradingView.com

The USD/CAD tried to climb out of its bearish channel twice in as many weeks, but on both occasions failed to show any further upside follow through, with resistance coming in at 1.3735. This, therefore means that the trend is somewhat directionless in the short term outlook, which is also indicated with price oscillating around a flattening 21-day exponential moving average.

The key level to watch is at around 1.3600. This level was resistance on multiple occasions, starting in December, then throughout March and early April, before we saw an eventual breakout. The rounded retest of this level from above has held firm on a number of occasions in mid-May. But the lack of upside follow-through means that more price action is needed in order to have a strong directional bias.

A clean break below 1.3600 would be a bearish development, although, for confirmation, a move below 1.3547 would still be required in my view, given that the technically important 200 day moving average converges between these two levels. This is what the bears would like to see. For the bulls, a clean break above 1.3735 resistance is needed now to tip the balance in their favour.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R