- The Bank of Canada became the first G7 central bank to cut interest rates.
- Markets expect a rate cut in Canada of 77 basis points this year.
- The probability of a Fed rate cut in September rose to 69%.
The USD/CAD outlook is bullish as the loonie remains fragile after the Bank of Canada implemented its first rate cut in four years. The dollar was also weak after mixed US data, but strengthened against the Canadian dollar.
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The Bank of Canada became the first G7 central bank to cut interest rates on Wednesday. The central bank cut rates by 25 basis points as expected, deviating from the Federal Reserve. This has created an interest rate differential that weighs on the Canadian dollar.
More rate cuts from the Bank of Canada are likely to leave the currency more vulnerable. Markets expect a rate cut in Canada of 77 basis points this year. This is a more significant figure than the Fed’s 50 basis points. Furthermore, the likelihood of the Fed’s first tapering in September is still fluctuating with incoming data. Therefore, there is no certainty when rates will begin to decline in the US.
Elsewhere, data revealed growth in Canada’s services sector in May. The business activity index rose from 49.3 in April to 51.1. If the Canadian economy returns to growth, the BoC may become more cautious about future rate cuts.
Meanwhile, data from the US was mixed. The service sector grew, while employment in the private sector revealed softness in the labor market. Still, the probability of a Fed rate cut in September rose to 69%. The market’s focus is now shifting to the upcoming non-farm payrolls report.
USD/CAD Key Events Today
USD/CAD Technical Outlook: Bulls fail to complete channel breakout
On the technical side, the USD/CAD price is trading above the 30-SMA with RSI above 50, supporting the bullish bias. However, it is still trading within a shallow, bearish channel. The price recently made a sharp bullish move that broke through channel resistance and the 1.3720 level.
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However, the bulls were not strong enough to sustain the move and break out of the channel. Consequently, the price pulled back to retest the 30-SMA support. Nevertheless, if the SMA holds firm as support, the price could make another attempt to break above the channel resistance. However, if it breaks, the bears will revisit the channel support.
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