The USD/CAD pair began the week on a downward trajectory, driven by a wave of US Dollar selling. This decline comes as traders anticipate potential interest rate cuts by the Federal Reserve (Fed) later this year. The market speculation is based on the belief that the Fed might reduce interest rates by a quarter of a percentage point twice before the year's end. Adding to the mix are trade tensions, with President Trump confirming tariffs on Canada and Mexico starting Tuesday and plans to double tariffs on Chinese imports.
The backdrop for these developments was set on Friday when US inflation data aligned with expectations. The core Personal Consumption Expenditures (PCE) Price Index, excluding food and energy, rose by 0.3% last month and 2.6% year-over-year. This data reinforces the perception of a stable inflation environment, yet it does not dispel concerns about consumer sentiment, which has shown signs of deterioration. The CME Group's FedWatch Tool reflects these sentiments, projecting that the Fed will resume rate cuts in June, followed by another reduction in September.
In parallel, the EUR/USD pair maintained its rebound above the 1.0400 mark during European trading on Monday. This was amidst hopes of a positive outcome from the European Union's peace initiatives concerning the Ukraine conflict, which could bolster the Euro further. Meanwhile, the GBP/USD pair defended its position near 1.2600 in the European session, sustained by the US Dollar's retreat and the possibility of a truce in Ukraine.
The USD/CAD pair's performance has been under scrutiny, especially after breaking its six-day winning streak. Last Friday, it reached its highest level since February 4, around the 1.4470 area, before stalling near the 50% Fibonacci retracement level of its pullback from an early February multi-year peak. Despite this setback, daily chart oscillators remain in positive territory, hinting at the potential for the USD/CAD pair to surpass the significant psychological level of 1.4500.
Consumer spending in the United States has also played a role in shaping market sentiment, having dipped by 0.2% – marking its first decrease since March 2023 and its most significant decline in nearly four years. This downturn aligns with fragile consumer confidence and strengthens expectations for Fed rate cuts.
In addition to these economic indicators, market participants are eyeing the upcoming US ISM Manufacturing PMI data. This release is expected to further influence the Greenback's trajectory. Meanwhile, President Trump's tariff announcements have injected additional uncertainty into global trade dynamics, particularly affecting North American partners Canada and Mexico.
Furthermore, the Fed's potential rate cuts and trade policies continue to weigh heavily on investor sentiment. The prospect of reduced borrowing costs is aimed at stimulating economic growth but also signals underlying concerns about economic momentum. These factors collectively contribute to increased volatility in currency markets.