USD/CAD falls toward 1.3850 as Fed’s Beige Book suggests deteriorating economic conditions

USD/CAD weakens as the Fed’s April Beige Book underscores the potential negative impact of tariffs on the economic outlook.
The US Dollar also loses ground after the flash Composite PMI pointed to a slowdown in overall business activity.
President Trump suggested the 25% tariff on Canadian auto imports to the US could be raised.

Akhtar Faruqui FXStreet

USD/CAD edges lower around 1.3870 during Thursday's Asian session, after climbing roughly 0.50% in the previous day. The pair is under pressure as the US Dollar (USD) weakens following the Federal Reserve’s April Beige Book, which pointed to deteriorating economic conditions.

The report highlighted growing concerns about tariffs, which have negatively impacted the economic outlook across multiple US regions. Consumer spending appeared uneven, and labor market conditions softened, with many districts noting stagnant or slightly declining employment.

Further pressuring the Greenback were Wednesday’s mixed S&P Global PMI figures. The flash Composite PMI for April fell to 51.2 from 53.5, signaling a slowdown in business activity. While the Manufacturing PMI ticked up slightly to 50.7, the Services PMI dropped sharply to 51.4 from 54.4, reflecting weaker demand in the services sector. Chris Williamson of S&P Global noted that growth momentum is waning, with persistent inflation complicating the Fed’s policy outlook.

However, the USD/CAD pair appreciated on Wednesday as the Canadian Dollar (CAD) remained under pressure. This came after US President Donald Trump suggested that a 25% tariff on Canadian auto imports to the US could be increased. Trump emphasized efforts to strike a deal with Canada, aiming to boost US auto production and reduce reliance on foreign vehicles, according to Reuters.

Meanwhile, the Canadian Dollar (CAD) also struggles due to the International Monetary Fund’s (IMF) downward revision of Canada’s 2025 GDP growth forecast to 1.4% has renewed concerns about weakening domestic demand, Additionally, the Bank of Canada’s (BoC) decision to keep its benchmark interest rate steady at 2.75% underscores a cautious stance, influenced in part by ongoing uncertainty surrounding potential US tariffs.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.

How do the decisions of the Bank of Canada impact the Canadian Dollar?

The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.

How does the price of Oil impact the Canadian Dollar?

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.

How does inflation data impact the value of the Canadian Dollar?

While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.

How does economic data influence the value of the Canadian Dollar?

Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.

Author

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

GBP/USD bounces off lows, back above 1.3200

After bottoming out near 1.3160, GBP/USD manages to regain a bit of shine and reclaim the 1.3200 mark and beyond at the end of the week. Stronger-than-expected UK Retail Sales data seem to be helping the British Pound limit its losses, while the chaotic UK political environment keeps the bulls at bay for now.

EUR/USD declines to near 1.1450 amid concerns over progress for US-Iran peace deal

The EUR/USD pair drifts lower to around 1.1460 during the early Asian session on Monday. Concerns about progress for the US-Iran peace deal and expectations of higher US interest rates boost a safe-haven currency such as the US Dollar against the Euro. European Central Bank President Christine Lagarde is set to speak later on Monday.

$4,100 in sight: Gold appears vulnerable on bumpy US-Iran talks

Gold licks wounds early Monday, following a 1.5% weekly loss and eyeing more declines. The US Dollar stands tall on strained US-Iran peace talks after Trump’s threats, Strait of Hormuz closure. Gold looks to attack $4,100 amid a bearish technical setup on the daily chart.

Breaking: Iran closes the Strait of Hormuz amid ceasefire deal violation

Iran says it is closing the Strait of Hormuz after accusing the United States (US) and Israel of violating the ceasefire. According to Iran, the decision came over the continued Israeli strikes in Lebanon. The Iranian Revolutionary Guard Corps Navy issued a warning to all vessels: "Do not approach the Strait of Hormuz; otherwise, your security will be jeopardized."

Week ahead: Fed’s hawkish tilt and Iran deal turn focus to PCE inflation and PMIs

New Fed Chair Kevin Warsh didn’t waste any time in his first FOMC meeting in prioritizing the need for the central bank to bring inflation back within the Fed’s 2% objective, unsettling markets just as subsiding geopolitical risks had lifted the mood in the past week.

Regime change: Inside Kevin Warsh's first move to make the Fed unreadable on purpose

The rate did not move. That was the least interesting thing about Kevin Warsh's first meeting in charge of the Fed. The FOMC held its benchmark at 3.50%-3.75% for the fourth straight meeting, exactly as priced, and then the new chair used his first press conference to dismantle the machinery the market has leaned on for a decade.