- The Canadian economy grew more slowly than expected in Q1.
- The probability of a Bank of Canada rate cut in June rose from 66% to 83%.
- The core US PCE price index rose a slower 0.2% in April.
The USD/CAD outlook turned bullish on Monday as the Canadian dollar weakened on the back of a Bank of Canada rate hike that lowered expectations. At the same time, the dollar recovered after falling on Friday due to a slowdown in US inflation.
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Data on Friday showed that the Canadian economy grew more slowly than expected in Q1, raising expectations for a Bank of Canada interest rate cut this week. In particular, the Canadian economy grew by 1.7%, well below the forecast of 2.2%. As a result, the probability of a rate cut in June increased from 66% to 83%. This means that Canadian interest rates will begin to decline much earlier than those in the US, creating an interest rate gap.
Meanwhile, the U.S. dollar recovered from Friday’s slide when inflation data came in lower than expected, raising the odds that the Fed will cut in September. The core PCE price index rose 0.2% in April, below economists’ expectations for a 0.3% increase. This was the second lower surprise in May that sent the dollar down. Following the report, the likelihood of a Fed rate cut in September rose slightly from 49% to 53%.
However, there is still a lot of uncertainty about the Fed’s policy. Policymakers are waiting for more evidence that inflation will fall to the central bank’s target, so they have remained largely cautious.
USD/CAD Key Events Today
- US final manufacturing PMI
- US ISM manufacturing PMI
USD/CAD Technical Outlook: Bulls are testing the 30-SMA resistance within the bearish channel
On the technical side, the USD/CAD price is recovering after finding support at the 1.3605 level. The bulls have regained momentum, with the RSI just above 50, and are challenging the 30-SMA resistance. A break above the SMA would confirm a change in bullish sentiment.
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However, since the price is also trading within a shallow bearish channel, the move would more likely stall at the 1.3720 level or channel resistance. If the larger bearish trend continues, the price will jump lower at the channel resistance. However, if the bulls are ready to reverse the trend, the price will break out of the bearish channel and make a higher high.
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