Fed Rate Pause Fears Offset Treasury Yield Climb

Overview

The USD to CAD exchange rate experienced a slight decline on Thursday, defying the usual trend of a stronger U.S. Dollar in response to rising U.S. Treasury yields. At 8:30 a.m. GMT, the 10-year Treasury yield increased by over four basis points to 3.7855%, while the 2-year Treasury yield rose by more than four basis points to 4.7981%. However, the relationship between rising yields and a stronger U.S. Dollar did not hold true on Thursday.

Investors Await Economic Data, Fed

Investors are carefully assessing the state of the economy and eagerly anticipating fresh economic data, as well as the upcoming Federal Reserve meeting. The market is particularly focused on June’s existing home sales data and the weekly initial jobless claims, which could provide valuable insights into the state of the U.S. economy. These figures will likely influence the decisions made by the Federal Reserve regarding monetary policy.

Initial Jobless Claims on Tap

Later in the day, investor attention will turn to the initial U.S. jobless claims data for the week ending July 15. The forecast suggests a rise to 242,000 from the previous week’s seasonally adjusted 237,000. The outcome of these economic indicators will shape market expectations for the Federal Reserve’s meeting next week.

Rate Hike in July Quickly Shifts to Uncertainty

While the market widely anticipates another interest rate hike at the upcoming meeting, the outlook for the remainder of the year remains uncertain. Investors will closely evaluate the guidance issued by the central bank, as well as the remarks from Fed Chair Jerome Powell. According to CME’s FedWatch tool, a 25 basis point rate hike is expected next week, maintaining the interest rates in the 5.25%-5.5% range for 2023.

Data Driven Markets

Last week, U.S. consumer inflation data came in lower than expected at 3%, indicating a potential easing of rising price pressures and the effectiveness of the Fed’s restrictive policy. However, the inflation figure still surpasses the central bank’s 2% target range.

Earlier this week, the USD to CAD initially strengthened after Statistics Canada reported that Canada’s annual inflation rate dropped to 2.8% in June, the lowest rate in over two years. However, the exchange rate quickly reversed its course following weaker-than-expected U.S. industrial production and retail data.

Short-Term Forecast:  Eyeing Fed for Guidance

Furthermore, on Wednesday, concerns arose that the Federal Reserve might pause its rate hikes after the anticipated increase at its July meeting. These factors influenced the downward trajectory of the USD to CAD exchange rate.

In summary, despite the rise in U.S. Treasury yields, the USD to CAD exchange rate edged lower on Thursday. Investors are closely monitoring economic data and eagerly anticipating the Federal Reserve’s meeting next week, which will provide valuable insights into the future direction of monetary policy.

Technical Analysis

The USD to CAD market is currently displaying bearish sentiment based. The 4-hour price is slightly higher than the previous close, indicating a small upward movement. However, the market is trading below the 200-4H moving average, suggesting a bearish trend. The 50-4H moving average aligns closer to but also under the current price, reafirming the downtrend.The 14-4H RSI is below 50, indicating weaker momentum.

The USD to CAD is currently inside the support zone, reinforcing the bearish sentiment. However, short-sellers remain vulnerable to a counter-trend short-covering rally. Overall, the market is currently bearish, but it’s essential to monitor trader reaction to the support zone.