USD/CAD refreshes multi-year peak, 1.4200 remains in sight on larger BoC rate cut bets

USD/CAD trades with positive bias for the third straight day and climbs to a fresh multi-year top.
Bets for a larger BoC rate cut and a modest downtick in Crude Oil prices undermine the Loonie.
A subdued USD price action caps the pair ahead of the US CPI and BoC decision on Wednesday.

Haresh Menghani FXStreet

The USD/CAD pair touches a fresh high since April 2020 during the Asian session on Tuesday, though it lacks follow-through buying and remains below the 1.4200 round-figure mark. The near-term fundamental backdrop, meanwhile, seems tilted in favor of bullish traders and suggests that the path of least resistance for spot prices remains to the upside.

The Canadian Dollar (CAD) continues to be weighed down by bets for a larger interest rate cut by the Bank of Canada (BoC) on Wednesday, bolstered by a jump in the domestic unemployment rate in November. Apart from this, a modest downtick in Crude Oil prices undermines the commodity-linked Loonie and acts as a tailwind for the USD/CAD pair, though the lack of follow-through US Dollar (USD) buying caps the upside.

The US Nonfarm Payrolls (NFP) report released on Friday reaffirmed bets that the Federal Reserve (Fed) will cut interest rates in December. This, in turn, keeps the US Treasury bond yields depressed near October lows and caps the post-NFP USD recovery from a nearly one-month through. However, expectations for a less dovish Fed should help limit any meaningful USD losses and offer some support to the USD/CAD pair.

Traders, meanwhile, might refrain from placing aggressive directional bets ahead of the key US macro data and the central bank event risk. The US Consumer Price Index (CPI) report is due for release on Wednesday and should offer cues about the Fed's rate-cut path, which will drive the USD demand. Adding to this, the BoC policy decision, also on Wednesday, will determine the next leg of a directional move for the USD/CAD pair.

Economic Indicator

BoC Interest Rate Decision

The Bank of Canada (BoC) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoC believes inflation will be above target (hawkish), it will raise interest rates in order to bring it down. This is bullish for the CAD since higher interest rates attract greater inflows of foreign capital. Likewise, if the BoC sees inflation falling below target (dovish) it will lower interest rates in order to give the Canadian economy a boost in the hope inflation will rise back up. This is bearish for CAD since it detracts from foreign capital flowing into the country.

GBP/USD flirts with tops near 1.3470

GBP/USD manages to regain composure and challenge the area of daily highs around 1.3470 on Friday. Cable picks up pace despite marginal gains in the Greenback in a context of swelling geopolitical tensions and rising global oil prices.

Gold remains below $4,100 despite receding Fed hike bets, weak USD

Gold opens with a bullish gap at the start of a new week amid receding Fed rate-hike expectations and a bearish US Dollar. Oil prices tumbled after Trump canceled an attack on Iran and said that a deal is near, easing inflation fears. This forces traders to dial back bets on extreme Fed tightening and drags the USD to a fresh low since June 17, which, in turn, is supporting the non-yielding bullion. However, the recent repeated failures to find acceptance above $4,100 warrant caution for XAU/USD bulls.

Gold: The $4,000 mark holds the downside for now

Gold faces renewed selling pressure, falling sharply toweard the $4,000 mark per troy ounce as the US Dollar regains momentum. Escalating US-Iran tensions are keeping inflation concerns and expectations of further Fed rate hikes alive, weighing further on the yellow metal.

Week ahead: US payrolls report and AI earnings to keep investors on edge

After the Fed decision, NFP report awaited for more rate hike clues. Employment also on the agenda in Canada and New Zealand. Chinese trade and Japanese wage data to be watched too. But Iran and AI headlines to remain in driver’s seat for risk sentiment.

Middle East War updates: Trump holds off Iran strikes on pledge Hormuz deal is close

Here’s a brief recap of the key developments in the Middle East war that occurred over the weekend, which are expected to have a significant impact on markets in the upcoming week. Risk sentiment improves on Monday, undermining demand for the US Dollar Index and drag crude oil prices lower.

9-3: Is the Federal Reserve’s vote tally Warsh's new forward guidance?

The rate did not move. Neither did the statement, and that’s the more interesting fact. Set the July 29 Federal Open Market Committee (FOMC) statement beside the one issued on June 17, and the two documents are identical apart from a single verb and a paragraph at the bottom naming three dissenters.