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USD/CAD is in the midst of a potential breakout to 4-month highs above 1.3925 resistance – could 1.40 be in play next?
USD/CAD Key Points
- This morning’s US reports all beat expectations handily, painting the picture of a stronger US economy than anticipated at the start of the week.
- The market-implied odds of two interest rate cuts by year’s end have been reduced from 82% at this time last week to 63%, nearing true “coin flip” territory
- USD/CAD is in the midst of a potential breakout to 4-month highs above 1.3925 resistance – could 1.40 be in play next?
It’s been over a week since the Federal Reserve delivered its expected 25bps interest rate cut and (narrowly) projected another two interest rate cuts this year. Despite the ostensibly “dovish” path Jerome Powell and Company laid out for interest rates for the rest of the year, we’ve seen the US dollar strengthen across the board, gaining anywhere from 0.65% to 1.40% against all its major rivals:
Source: FinViz
What’s Driving the Recent US Dollar Strength?
In a word, data!
This morning’s raft of second-tier data underscores the point:
Source: StoneX
As our economic calendar shows, Core Durable Goods Orders (0.4% m/m vs. -0.1% expected, Initial Jobless Claims (218K vs. 234K expected) and Q2 GDP revision (3.8% vs. 3.3% anticipated/previous) all beat expectations handily, painting the picture of a stronger US economy than anticipated at the start of the week.
Perhaps more to the point, the balance of Federal Reserve comments since the meeting suggests that the median dot projecting two more 25bps rate cuts this year is more fragile than initially assumed. The CME’s FedWatch tool has seen the projected probability of another interest rate cut next month fall from 92% heading into the day to closer to 85%:
Source: CME FedWatch
Moreover, the market-implied odds of two interest rate cuts by year’s end have been reduced from 82% at this time last week to 63% as we go to press, nearing true “coin flip” territory. In the coming weeks, traders will key in on top-tier US data (including tomorrow’s Core PCE report and next week’s NFP release) and FOMC policymaker comments to determine whether the Fed will ultimately be able to deliver the path outlined in last week’s Summary of Economic Projections.
If we keep seeing data come in solidly above expectations, I’m skeptical.
Canadian Dollar Technical Analysis: USD/CAD Daily Chart
Source: StoneX, TradingView
USD/CAD will be a key focus for the rest of the week. In addition to the aforementioned US Core PCE reading, traders will also get an update on GDP out of Canada tomorrow morning, setting the stage for a volatile start to the last Friday of the month.
From a technical standpoint, USD/CAD is in the midst of a potential breakout to 4-month highs above 1.3925 resistance. If the current breakout holds, it would open the door for a continuation toward at least the next resistance level near 1.40, where the 38.2% Fibonacci retracement of the H1 drop and 200-day MA converge.
Of course, there’s always a risk of a “fakeout breakout” following a long period of consolidation. In that scenario, we may see USD/CAD reverse to close back below the key 1.3925 level, and in time, retreat back to the middle of its consolidation range, and the 50-day EMA, near 1.3800.