Weekly USD/CAD Outlook: Defensive Stance Amid Bullish Prospects

Weekly USD/CAD Outlook: Defensive Stance Amid Bullish Prospects

The USD/CAD pairing continues to exhibit a downward trend in the final trading day of the week, maintaining its defensive position during the early European session. Despite this, the decline has yet to show substantial momentum. Presently, spot prices are hovering around the 1.3440 range, marking a minimal decrease of less than 0.10% for the day. It appears that the pair is set to expand upon its recent recovery efforts, which saw a notable improvement from the year-to-date low recorded in July.

Investor Focus Shifts to US Inflation Metrics; Anticipation of November Fed Hike Grows

Investor attention is currently directed towards the analysis of US inflation data, a factor that is guiding predictions and fostering speculation about an impending interest rate hike by the Federal Reserve in November.

July's US Producer Price Index surpassed expectations, registering a month-on-month increase of 0.3%, resulting in a year-on-year upswing of 0.8%. The core measure, which excludes volatile components, exhibited a 0.3% month-on-month gain, surpassing the projected 0.2%. This translated to an annual rate of 2.4%, further solidifying the notion of inflationary pressures.

This development has triggered an upswing in US bond yields, across various maturities. The 10-year bond yield has surged to 4.13%, while the 2-year yield currently stands at 4.87%. Additionally, the 5-year yield is at 4.25%. This increase in yields can be attributed to a growing consensus among investors, who are now leaning towards a 25 basis point hike during the forthcoming November Federal Reserve meeting. According to the CME FedWatch tool, the likelihood of this outcome now stands at 64%, reflecting a notable shift from last week's figures. Conversely, prospects for a hike during the September meeting remain less compelling.

In addition to the inflation figures, data released by the University of Michigan indicates that its Sentiment index has risen to 71.2, surpassing expectations set at 71. Meanwhile, 5-year Consumer Inflation Expectations have retreated to 2.9%.

Oil Prices Surge, Bolstering the Canadian Dollar

Parallelly, oil prices have resumed their upward trajectory, a development that holds particular significance for the Canadian economy due to its status as a major exporter of energy resources. The surge in oil prices has consequently fortified the Canadian Dollar.

While no significant data releases are scheduled for Friday concerning the Canadian economy, the prevailing trends in USD/CAD and the broader financial landscape continue to underscore the nuanced interplay between economic indicators and global market dynamics. As market participants navigate these factors, vigilance and adaptability remain paramount in capitalizing on emerging opportunities.