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USD/CAD extends gains above 1.3800 with all eyes on the FOMC Minutes

  • The US Dollar remains firm, drawing support from the positive US Consumer Confidence data and easing trade war fears.
  • The CAD remains on the defensive amid lower Oil prices and hopes of further BoC cuts.
  • Later today, the tone of the FOMC minutes is likely to confirm the US Dollar’s near-term direction.

The US Dollar is showing a moderate advance on Wednesday, extending gains after Tuesday’s rebound. Upbeat US Consumer Confidence data and easing fears about trade wars are supporting the Greenback, with the release of the Fed minutes on focus.

The Conference Board’s Consumer Confidence reading beat expectations on Wednesday with a 12.3 point rebound to a 98.0 reading, after having deteriorated steadily during the last five months, on the back of tariff uncertainty.

Upbeat US data sends debt fears to the background

The same survey revealed improving expectations on income, business conditions, and employment, while the percentage of consumers fearing an economic recession in the next 12 months declined, compared to the previous month.

These figures offset a significant decline in US Durable Goods orders, which fell by 6.3% in April, on the back of lower demand for aircraft. Likewise, the risk-on sentiment pushed government debt fears to the back seat, at least for now.

The Canadian Dollar, on the other hand, remains on the defensive, with Oil prices ticking lower, weighed by expectations that OPEC+ countries will increase supply from July. Furthermore, last week’s data strengthened the case for further BoC easing in June, adding selling pressure on the Loonie. 

Today, the focus is on the minutes of the latest Fed meeting, which are expected to shed some more light on the bank’s upcoming monetary policy decisions. The tone of the minutes is likely to determine the US Dollar’s reaction until Friday’s PCE inflation release.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Author

Guillermo Alcala

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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