- The weakness in the US labor market will increase the urgency of Fed rate cuts.
- Investors will now await next week’s US CPI report.
- The Canadian dollar strengthened as oil prices recovered.
The USD/CAD outlook is bearish as the dollar eases on Fed rate cut expectations. Meanwhile, the Canadian dollar extended its recovery this week amid a rally in oil prices.
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The dollar weakened slightly on Thursday as investors priced in the first Fed rate cut in September. Earlier in the week, the focus was on the risk of a recession in the US. However, calm has returned, and traders are now looking at the likelihood of a 50 bps rate cut in September.
The shift to a more sizable cut came after last week’s poor jobs report. Weakness in the labor market will increase the urgency of rate cuts, weighing on the US dollar. At the same time, policymakers have taken a more dovish stance, indicating confidence that demand is declining.
Investors will now await the US CPI report, which will continue shaping the outlook for Fed policy. More easing in price pressures will solidify bets for a September rate cut. On the other hand, any spikes could reduce rate-cut expectations and support the dollar.
On the other hand, the Canadian dollar strengthened as oil prices recovered. Oil rose after a bigger-than-expected drop in US crude inventories. At the same time, supply concerns amid growing Middle East tensions remained.
The loonie is moving farther away from the two-year low hit on Monday. However, despite the recent rebound, the Bank of Canada remains concerned about the economy. As a result, markets expect more rate cuts in Canada, putting pressure on the Canadian dollar.
USD/CAD key events today
USD/CAD technical outlook: Bears inch closer to the 1.3701 support
On the technical side, the USD/CAD price is approaching the 1.3701 key support level. The bearish bias is strong, with the price trading well below the 30-SMA and the RSI in bearish territory. However, the price might pause after the recent sharp swing to allow the 30-SMA to catch up. Moreover, it might pull back to retest the SMA before falling lower.
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If bears break below the 1.3701 level, they will target the next support at 1.3601, and the downtrend will continue as long as the price trades below the SMA.
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