USD/CAD outlook: Stronger US data could put floor under Loonie

The US dollar bounced sharply off its earlier lows following the publication of above-forecast economic data, which helped to further fuel bets that the Fed will tighten its belt one more time in July by 25 basis points. As the USD/JPY jumped to 140.00, gold and silver correspondingly came off their earlier highs and turned lower as worries about even higher interest rates unnerved some investors. The strong US data means the USD/CAD outlook could turn positive if today’s bullish price action is confirmed on a closing basis.

 

US data beat expectations

 

• Consumer Confidence 109.7, Exp. 103.9, Last 102.5 – highest since January 2022
• New Home Sales 763K, Exp. 675K, Last 680K
• Richmond Fed -7, Exp. -12, Last -15

 

The big surprise was the surge in new home sales, which blew past analysts’ expectations with a rise of 12% in May. On top of this, the Conference Board’s closely watched Consumer Confidence index recovered significantly to reach its highest point since January 2022.

 

While the above are not top-tier economic data, the Fed will no doubt take note when it comes to making a decision on monetary policy in July. Most economists agree, along with market expectations, that a further 25 basis point rate hike is likely before a long pause.

 

With US interest rates set to rise further, and monetary policy to remain contractionary, this should keep the dollar supported against currencies where the central bank is turning more dovish or where the data is deteriorating.

 

This is why the likes of the USD/JPY and USD/CNH have been on a tear of late. But we could see some of the other major currency pairs also start to move in the favour of US dollar again, after their recent sharp gains.

 

One such pair is the USD/CAD which has turned higher on the session following the stronger US data and weaker Canadian inflation print.

 

The Bank of Canada hiked interest rates by 25bp at their last meeting, which came as a surprise to the consensus estimates for a pause. Although the BOC left room for further hikes, today’s slightly weaker CPI data means the probability of another hike has fallen.

 

USD/CAD outlook: technical analysis

 

At the time of writing, the USD/CAD had turned positive on the session but remained a touch lower on the weak. It has fallen for 4 straight weeks, but in light of today’s data releases the bulls will try to prevent a 5^th week of falls. Will they be successful?

 

The USD/CAD has dipped into a long-term support zone, starting around 1.3150 area. Previously, this was a massive resistance zone until the rates broke higher in September. So, there is a good chance we may see the USD/CAD form at least a temporary low in this zone now.

 

But the bulls must see that confirmation first before potentially looking for long trades, and for the USD/Cad outlook to turn more positive.

Source: TradingView.com

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R