The US dollar to Canadian dollar pair extended its weakness during Friday's European trading session, with the exchange rate retreating to around 1.4160. The market is reassessing the impact of the Federal Reserve's interest rate trajectory, changes in the crude oil market, and Canada's economic fundamentals on the Canadian dollar. The primary reason for the recent pressure on the US dollar is the market's reduced expectations for further Fed rate hikes. The minutes from the Fed's June meeting indicated that policymakers remain focused on inflationary pressures, with some officials noting that the possibility of future rate increases remains if price pressures persist.
However, market bets on near-term Fed policy adjustments have decreased. According to market pricing tools, investors now see the probability of a 25-basis-point rate hike by the Fed in July at approximately 24.6%, down from around 31% previously. Expectations for a rate hike at the September meeting have also declined from 66.6% to 62.3%. This scaling back of Fed rate hike expectations has been a significant factor in the US dollar's recent weakness.
New York Fed President John Williams stated that, despite fluctuations in the Middle East situation, he does not believe energy prices will continue to rise sharply for the remainder of the year. This view has alleviated some investor concerns about long-term inflationary pressures and has also influenced US dollar interest rate expectations. Concurrently, the Canadian dollar is receiving support from crude oil prices. Due to disruptions in transport activities in the Strait of Hormuz, the market remains attentive to global energy supply risks, keeping international oil prices at relatively elevated levels. Recent developments in the Middle East have heightened volatility in energy markets, and rising oil prices have boosted expectations for Canadian export revenues.
As a major global crude oil exporter, higher oil prices typically benefit the Canadian dollar. Elevated energy prices strengthen expectations for Canada's trade income, providing additional support for the loonie and driving a short-term decline in USD/CAD. Nevertheless, the impact of rising oil prices on global inflation remains a key market focus. If energy prices continue to climb, it could compel major central banks to maintain higher interest rate levels, thereby influencing the US dollar's trajectory anew. Furthermore, uncertainty persists in the Middle East situation, and any escalation of risks could alter market capital flows.
The current USD/CAD movement is influenced by both US dollar weakness and oil price support. On one hand, diminishing Fed rate hike expectations are reducing the US dollar's appeal. On the other hand, Canada's energy advantage is enhancing the Canadian dollar's performance. However, if the market were to reinstate higher expectations for Fed tightening in the future, the US dollar could still find opportunities for a rebound.
Analyzing the Daily Chart
From a daily chart perspective, USD/CAD has maintained a fluctuating downtrend recently, with the price currently falling to around 1.4160, indicating short-term bearish dominance. The moving average system shows the exchange rate gradually breaking below short-term moving averages, suggesting weak market momentum. Key support below is observed around the 1.4120 area, with further levels to watch at 1.4080 and 1.4050. Resistance above is seen in the 1.4180 to 1.4200 zone; a break above this could lead to a test near 1.4250. The MACD indicator shows bearish momentum has increased somewhat, but caution is warranted for a potential bounce as it approaches key support areas.
Examining the 4-Hour Chart
From a 4-hour chart perspective, USD/CAD shows a short-term descending structure, with the price trading below the moving averages, indicating persistent selling pressure. The RSI indicator is in a weak zone, reflecting a bearish market sentiment, but it is also nearing oversold levels, suggesting a possible technical correction in the short term. If the exchange rate breaks below 1.4120, it could open the door for further downside. Conversely, a move back above 1.4180 could alleviate short-term corrective pressure.
Key Market Drivers
The recent weakness in USD/CAD is primarily driven by declining US dollar interest rate expectations and the support for the Canadian dollar from rising crude oil prices. Canada's energy export advantage makes oil prices a significant factor influencing the exchange rate, while the future path of Fed policy will determine the US dollar's medium-term direction. In the short term, if crude oil prices continue to be supported by supply risks and Fed rate hike expectations cool further, USD/CAD may continue testing lower support zones. However, if Middle East risks ease leading to an oil price pullback, or if US inflation data re-accelerates, the US dollar to Canadian dollar exchange rate could regain upward momentum. Investors should closely monitor energy market developments, Federal Reserve policy signals, and global risk sentiment.
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