Market Data 
- USD/CAD hangs near a two-week low touched amid a dovish Fed-inspired USD downtick.
- The recent rally in Oil prices underpins the Loonie and contributes to capping the major.
- Bets for a larger interest rate cut by BoC act as a headwind for the CAD and limit losses.
The USD/CAD pair struggles to gain any meaningful traction during the Asian session on Friday and currently trades around the 1.3555 region, well within the striking distance of a nearly two-week low touched the previous day.
The US Dollar (USD) remains under some selling pressure for the second straight day and languishes near its lowest level since July 2023 touched in reaction to the Federal Reserve’s (Fed) oversized interest rate cut on Wednesday. Moreover, Fed members projected another 50 basis points fall in borrowing costs by the end of this year, which, along with the prevalent risk-on mood, weighs on the safe-haven Greenback and acts as a headwind for the USD/CAD pair.
Meanwhile, Crude Oil prices consolidate the recent strong move up to over a two-week high and remain on track to register gains for the second straight week amid worries about declining global stockpiles. Apart from this, rising tensions in the Middle East offer some support to the black liquid, which underpins the commodity-linked Loonie and contributes to capping the USD/CAD pair, though dovish Bank of Canada (BoC) expectations help limit the downside.
The markets started pricing in the possibility of a larger, 50 bps BoC rate cut move next month after data published this week showed that Canada’s CPI posted its smallest increase since February 2021 and the core measures fell to the lowest level in 40 months. This, in turn, is holding back bulls from placing aggressive bets around the Canadian Dollar (CAD) and lending some support to the USD/CAD pair ahead of Friday’s release of Retail Sales data from Canada.
Apart from this, traders will take cues from BoC Governor Tiff Macklem’s speech later during the early North American session, which, along with Oil price dynamics, should influence the CAD. Furthermore, Philadelphia Fed President Patrick Harker’s remarks and the broader risk sentiment will drive the USD demand, which should provide some impetus to the USD/CAD pair. Nevertheless, spot prices seem poised to register losses for the first week in the previous three.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
