The USD/CAD currency pair is experiencing positive momentum, trading close to 1.4105 in early European sessions on Thursday. The uptick in the US Dollar against the Canadian Dollar can be attributed to a hawkish stance from the Federal Reserve (Fed), which has ignited speculation about potential interest rate hikes. This follows the Fed’s decision during its June policy meeting to maintain interest rates in the range of 3.50%-3.75%, while simultaneously signaling the possibility of raising rates later this year. The Fed is considering the implications of rising inflation influenced by the ongoing US-Iran situation.
Kimmy Tong, a global market and FX strategist at Everbright Securities International, remarked, “Markets are examining whether the Strait of Hormuz can be reopened for free passage. Until that is confirmed, sentiment favoring a stronger dollar should continue to dominate,” referencing the Fed’s tightening bias.
From a technical perspective, the daily chart indicates that USD/CAD is maintaining a strong bullish momentum, with prices trading above the 100-day simple moving average (SMA) and the middle line of the Bollinger Bands. This suggests a robust breakout phase rather than a temporary spike. However, the Relative Strength Index (RSI) is nearing 83, signaling overbought conditions and the potential for a corrective pullback, even within the existing upward trend.
Support levels are established, with initial backing around the previous Bollinger upper band zone at approximately 1.4100. This is followed by the Bollinger middle band near 1.3913, where a decline would still uphold the broader bullish structure. Should there be a more substantial retracement, demand zones are identified around the 100-day SMA at 1.3747 and the lower Bollinger band at approximately 1.3726. Buyers are likely to step in at these levels, aiming to sustain the positive trajectory as long as these support zones remain intact.
In addition to the factors influencing the USD, several elements drive the Canadian Dollar (CAD). The key drivers include interest rates set by the Bank of Canada (BoC), oil prices, the health of the Canadian economy, inflation levels, and trade balance metrics. As Canada is a significant oil exporter, fluctuations in oil prices usually have a direct impact on the CAD. A rise in oil prices generally strengthens the Canadian Dollar, while a decline typically weakens it.
The BoC plays a crucial role by determining interest rates, which affect lending rates across the economy. The central bank aims to maintain inflation within a target range of 1-3%. Higher interest rates tend to be favorable for the CAD, as they attract foreign investment. Conversely, quantitative easing can negatively influence the currency.
In the current economic landscape, inflation can sometimes exert a contradictory influence. While traditionally seen as detrimental to a currency, higher inflation often leads central banks to increase interest rates, attracting capital inflows and bolstering demand for the local currency, which, in Canada’s case, is the CAD.
Macroeconomic indicators, including GDP growth, manufacturing, services PMIs, employment data, and consumer sentiment surveys, also play a significant role in determining the CAD’s value. A robust economy attracts foreign investment and can encourage the BoC to raise interest rates, further strengthening the currency. Conversely, weak economic performance is likely to result in a decline in the Canadian Dollar.
