Loonie’s Rally Checked by Crude Oil and U.S. Rates

Highlights

• USD to CAD rises, driven by U.S. Treasury yields, marking the U.S. Dollar as a prime asset.
• U.S. Treasury yields have surged to decade-high levels post Federal Reserve’s policies.
• Declining oil prices cause a Canadian Dollar pullback after an eight-day rally.
• The strength of the U.S. dollar influences other risk assets, including the Loonie.

Overview

The USD to CAD pair has been on the upswing, driven by climbing U.S. Treasury yields that make the U.S. Dollar an increasingly attractive proposition. On the other hand, declining crude oil prices prompt a pullback, especially after the Canadian Dollar’s crude oil driven eight-day rally. As of 09:09 GMT, the pair stands at 1.3495, marking an increase of 0.0033 or +0.25%.

U.S. Treasury Yields and Federal Reserve Outlook

Treasury yields in the U.S. have soared to levels not seen in over a decade, following the Federal Reserve’s decisions and its forward-looking policy framework. While maintaining current interest rates, the Fed hints at a possible rate increase by the close of the year and a consistent elevation in rates beyond that. The projected rate reductions for 2024 now stands at two, a revision from the initial four forecasted last June.

Economic Projections and Inflation

The Fed’s recently released economic projections predict a 2.1% growth in the gross domestic product for the year, significantly surpassing earlier estimates. Meanwhile, the anticipated inflation rate, gauged by the core personal consumption expenditures price index, is adjusted to 3.7%, a markdown from the earlier June forecast. Jerome Powell, the Fed Chair, highlighted the need for a judicious approach to monetary policy in the ongoing tussle against inflation.

Impact on USD to CAD and Oil Prices

The U.S. dollar’s strength is causing a shift in other risk-associated assets, including the Canadian Dollar, which recently reached notable levels. Influenced by robust domestic inflation data, this hinted at further rate hikes from the Bank of Canada. Yet, the dip in oil prices, crucial to Canada’s exports, recorded a 1% drop to $90.28 a barrel, surrendering some previous gains.

Short-term Forecast

Considering the dynamic nature of Treasury yields, the Federal Reserve’s cautious stance, and volatile crude oil prices, the short-term outlook for the USD to CAD pair appears to lean bullish. Decisions from both the Federal Reserve and the Bank of Canada, combined with vital economic markers like inflation rates and oil prices, will be instrumental in dictating the pair’s upcoming movements.

Technical Analysis

The current 4-hour price for the USD to CAD, at 1.3498, is slightly higher than its preceding 4-hour price of 1.3494. The pair is below both the 50-4H moving average of 1.3512 and the 200-4H moving average of 1.3531, but it’s showing signs of an upward trajectory as it approaches these averages. The 14-4H RSI reading of 54.13, slightly above the neutral mark, underscores this emerging bullish momentum.

Currently, the price is edging closer to the main resistance area between 1.3483 and 1.3508, yet it remains comfortably above the main support zone spanning 1.3412 to 1.3372. Given this context, the market sentiment is cautiously bullish, but traders should watch the approaching resistance levels.