- USD/CAD stalls the overnight pullback from a multi-year peak.
- The divergent BoC-Fed outlook acts as a tailwind for the pair.
- Rebounding Oil prices underpin the Loonie and cap the major.
- Traders now look to the US PCE Price Index for a fresh impetus.
The USD/CAD pair finds some support near the 1.4470 region during the Asian session on Friday and for now, seems to have stalled the previous day's pullback from its highest level since March 2020. Spot prices currently trade just below the 1.4500 psychological mark and remain on track to register strong weekly gains.
The Canadian Dollar (CAD) continues to be weighed down by the Bank of Canada's (BoC) relative dovish stance and concerns about US President Donald Trump's threatened trade tariffs. In fact, the BoC decided to cut interest rates for the sixth time in a row since June and announced an end to its quantitative tightening program. Moreover, Trump reiterated his threat to impose 25% tariffs on Mexico and Canada – the top two US trade partners. This is seen as a key factor acting as a tailwind for the USD/CAD pair.
The US Dollar (USD), on the other hand, manages to preserve weekly recovery gains in the wake of the Federal Reserve's (Fed) hawkish pause on Wednesday and a modest bounce in the US Treasury bond yields. This turns out to be another factor lending some support to the USD/CAD pair. That said, the uncertainty over the Trump administration's economic policies caps the USD. Apart from this, a further recovery in Oil prices underpins the commodity-linked Loonie and caps the upside for the currency pair.
Traders also seem reluctant to place aggressive bets ahead of Friday's release of the monthly Canadian GDP and the US Personal Consumption Expenditure (PCE) Price Index – the Fed's preferred inflation gauge. The latter will play a key role in influencing demand for the USD, which, along with Oil price dynamics, should provide some impetus to the USD/CAD pair later during the US session. Nevertheless, the fundamental backdrop suggests that the path of least resistance for spot prices remains to the upside.
Economic Indicator
Personal Consumption Expenditures - Price Index (YoY)
The Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The YoY reading compares prices in the reference month to a year earlier. Price changes may cause consumers to switch from buying one good to another and the PCE Deflator can account for such substitutions. This makes it the preferred measure of inflation for the Federal Reserve. Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.
Read more.Next release: Fri Jan 31, 2025 13:30
Frequency: Monthly
Consensus: 2.6%
Previous: 2.4%
Source: US Bureau of Economic Analysis
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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