USD/CAD eyes a breakout amid strong US data and shifting interest rate expectations. Is 1.40 next, or is a fakeout brewing?
USD/CAD Breakout Watch: US Data Fuels Interest Rate Speculation
The USD/CAD pair is making moves, driven by solid US economic data and evolving expectations around interest rates. Will this breakout last, or is it a head fake? Let's dive in.
The Data-Driven Dollar
Despite the Federal Reserve's recent interest rate cut and hints at more to come, the US dollar has been surprisingly strong. Why? It's all about the data, baby! Recent figures, including Core Durable Goods Orders, Initial Jobless Claims, and Q2 GDP revisions, have all exceeded expectations, painting a rosy picture of the US economy.
This strong data has led to a shift in expectations for future rate cuts. The CME's FedWatch tool shows a decrease in the projected probability of another rate cut next month. The market is now less certain about two rate cuts by year's end.
USD/CAD Technicals: Breakout or Fakeout?
Technically, USD/CAD is testing 4-month highs above the 1.3925 resistance level. A sustained breakout here could pave the way for a move towards 1.40, where the 38.2% Fibonacci retracement and the 200-day moving average converge.
However, be warned! After periods of consolidation, "fakeout breakouts" are common. A reversal below 1.3925 could signal a return to the consolidation range, with a potential move back towards the 50-day EMA near 1.3800.
Trump Tariffs and the Fed
Adding another layer to the mix, new tariffs on pharmaceuticals, furniture, and heavy trucks are set to take effect. These tariffs aim to boost US manufacturing and address trade imbalances. Meanwhile, former President Trump has criticized the Federal Reserve for keeping interest rates too high, adding further complexity to the monetary policy outlook.
The Interest Rate Puzzle
The big question is whether the Fed will stick to its projected path of rate cuts in the face of strong economic data. If the data continues to impress, it's reasonable to be skeptical. All eyes will be on upcoming data releases, including the Core PCE report and the Non-Farm Payroll (NFP) release, as well as comments from FOMC policymakers.
Final Thoughts
USD/CAD is at a critical juncture. Strong US data is challenging the narrative of further Fed rate cuts, leading to a potential breakout scenario. But remember, the market is a fickle beast, and a fakeout is always a possibility. So, buckle up, keep an eye on the data, and get ready for a potentially volatile ride!
