USD/CAD steadies below 1.4200 as USD finds support near two-month low
- USD/CAD holds below 1.4200 as the US Dollar gains ground temporarily.
- The outlook of the US Dollar is uncertain due to multiple headwinds.
- Investors await the Canadian CPI data, which will influence the BoC's monetary policy outlook.
The USD/CAD pair ticks higher to near 1.4190 in Monday’s North American session after rebounding from a two-month low of 1.4150, which it posted on Friday. The Loonie pair edges higher as the US Dollar (USD) gains ground, with the US Dollar Index (DXY) holding the two-month low of 106.60. Investors should brace for thin trading volume as the United States (US) and Canada equity markets are closed on account of Family Day and President's Day, respectively.
However, the outlook of the US Dollar is still uncertain as its safe-haven appeal has diminished, with investors seeing US President Donald Trump’s tariff agenda as less fearful than thought.
On Thursday, Donald Trump didn’t reveal a detailed reciprocal tariff plan and asked his teams to work on them. However, the hype from his tweet at Truth Social indicated that he is ready with the plan and will impose it as early as possible.
“Three great weeks, perhaps the best ever, but today is the big one: reciprocal tariffs!!! Make America great again!!!", Trump said in the early North American trading hours on Thursday.
On the economic data front, poor US Retail Sales data has also weighed on the US Dollar. The Retail Sales data, a key measure of consumer spending, declined at a faster-than-expected pace of 0.9% in January.
Meanwhile, the Canadian Dollar (CAD) is expected to perform sideways as investors await the Canadian Consumer Price Index (CPI) data for January, which will be released on Tuesday. Month-on-month headline CPI is estimated to have grown by 0.1% after deflating 0.4% in December. The inflation data will influence market speculation about whether the Bank of Canada (BoC) will cut interest rates again in the March policy meeting.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
