In the first weeks of President Trump's tenure, key economic indicators have painted a complex picture for the USD/CAD currency pair. Traders and investors are keenly observing potential shifts in trade policy, particularly concerning the European Union, which could become Trump's next tariff target. Meanwhile, the US-China trade dynamics appear less favorable to Trump than during the initial trade war. Market participants are responding to these developments with cautious optimism, even as disappointing US economic data, including the ISM Services PMI, temper enthusiasm.
The US ISM Services PMI showed a decline from 54.0 to 52.8 in January, suggesting a slowdown in business activity within the sector. This disappointing result offset better-than-expected private sector employment figures. As a result, US Treasury yields have plummeted to their lowest point since mid-December, reflecting investor concerns over the economic outlook. These factors contribute to limiting a meaningful recovery of the US dollar.
Despite these challenges, the USD/CAD pair has shown resilience by rebounding from its year-to-date low. The pair aims to reclaim the 1.4600 round figure and potentially climb towards the 1.4665-1.4670 region. However, concerns about US-China trade tensions and expectations of further Federal Reserve rate cuts are likely to cap any substantial gains.
The Federal Reserve's rate cut bets are a significant factor warranting caution among USD bulls. The anticipation of lower rates may dampen demand for the US dollar, preventing a robust recovery in its value. Meanwhile, traders are eyeing the upcoming US Weekly Initial Jobless Claims data for short-term trading opportunities and further insights into the health of the labor market.
In contrast, the Bank of Canada (BoC) continues its dovish stance by cutting interest rates for the sixth consecutive time since June. This decision reinforces a cautious outlook for the Canadian economy and impacts the USD/CAD dynamic. Investors are closely monitoring these developments to assess potential market shifts.
Spot prices for the USD/CAD pair have rebounded but face challenges in extending gains. If downward pressure resumes, the pair might target intermediate support around 1.4170 en route to the 1.4125 region and potentially reach as low as 1.4100. Such movements are contingent on various factors, including ongoing trade negotiations and economic data releases.
Looking ahead, market participants are focusing on potential trade policies under President Trump's administration, especially regarding tariffs on the European Union. As Trump navigates these diplomatic waters, he may find less leverage over China compared to earlier trade conflicts. These geopolitical elements add layers of complexity to currency market forecasts.