President Donald Trump has decided to postpone his proposed 25% tariffs on imports from Canada and Mexico, providing temporary relief to the financial markets and easing economic tensions. On February 4, Trump announced the delay amid ongoing negotiations with both countries, which have agreed to bolster their border forces to curb the flow of fentanyl and undocumented immigrants into the United States. This decision has sparked a notable reaction in the currency markets, particularly the USD/CAD exchange rate.
In Tuesday's European trading hours, the USD/CAD pair was observed trading near 1.4260. The currency pair has maintained its gains following President Trump's announcement, which has provided some stability to the market. The 50-period Exponential Moving Average (EMA) slopes higher towards 1.4230, suggesting a bullish near-term trend for the USD/CAD pair. Additionally, the 14-period Relative Strength Index (RSI) trades above 50.00, indicating continued bullish momentum.
The US Dollar Index (DXY) remains slightly down but hovers around Monday's recovery move to near 106.70. The financial stability brought by this delay in tariffs is reflected in various currency pairs, with GBP/USD holding steady above 1.2600 during European trading on Tuesday. However, inflation in the Canadian economy continues to undershoot the Bank of Canada's (BoC) target of 2% for the past three months, adding pressure on Canada's economic outlook.
The delay in imposing tariffs by President Trump is crucial as it averts an immediate weakening of Canada's already vulnerable economy. BoC Governor Tiff Macklem has warned that slapping tariffs on all imports from Canada would have severe economic repercussions. The Bank of Canada continues to grapple with inflationary pressures, seeking to maintain its target inflation rate of 2%. Negotiated Wage Rates rose at a slower pace in Q4 compared to Q3, indicating challenges for the Euro's resilience against its rivals.
The USD/CAD pair's recent performance has been buoyed by President Trump's confirmation that plans for imposing tariffs in March are still under consideration. The pair broke out of the Descending Triangle chart pattern formed on an hourly timeframe, indicating potential bullish strength. However, if the pair breaks below its February 14 low of 1.4151, it risks falling further to its December lows of 1.4094 and 1.4020.
The Canadian economy faces additional challenges as it contends with undershooting inflation rates and a less-than-robust economic outlook. Despite these challenges, the postponement of tariffs provides a temporary reprieve and allows for continued diplomatic negotiations between Canada, Mexico, and the United States.