. USD/CAD Pair in Bullish Consolidation Phase - 12 May 2023

USD/CAD Pair in Bullish Consolidation Phase – 12 May 2023

12 May 2023

USD/CAD Pair in Bullish Consolidation Phase Amidst Global Economic Concerns.

The USD/CAD pair has been experiencing a bullish consolidation phase, oscillating in a narrow trading band around the 1.3800 mark, just below its highest level since October. This comes amidst a modest pullback in the US Dollar from over a three-month high and an uptick in Crude Oil prices, which is supporting the commodity-linked Loonie.

Hawkish Fed Expectations Support USD Bulls

While the downside for the USD/CAD pair is cushioned by worries about a deeper global economic downturn, the markets have started pricing in a jumbo 50 bps lift-off at the upcoming FOMC meeting on March 21-22. This is due to Fed Chair Jerome Powell’s remarks on Wednesday, reiterating that interest rates would have to go higher and possibly faster to tame stubbornly high inflation. The market’s expectations for further tightening by the Fed are supportive of elevated US Treasury bond yields and favour the USD bulls.

Rising Borrowing Costs and Fading Optimism Over Chinese Economic Recovery

However, the prospects for further tightening by the Fed also add to worries about economic headwinds stemming from rapidly rising borrowing costs. This could pose challenges for the global economy, which is still recovering from the pandemic. Furthermore, fading optimism over a strong Chinese economic recovery, which could dent fuel demand, should keep a lid on Crude Oil prices, suggesting that the path of least resistance for the USD/CAD pair is to the upside.

Conclusion

In conclusion, the USD/CAD pair is currently in a bullish consolidation phase, supported by hawkish Fed expectations and an uptick in Crude Oil prices. However, concerns about a deeper global economic downturn and rising borrowing costs could pose challenges for the global economy and limit the pair’s upside potential. Investors will be closely watching the outcome of the upcoming FOMC meeting to gauge the Fed’s stance on interest rates and inflation.

Technical Analysis

  • USD/CAD consolidating recent strong gains to the highest level since October.
  • Modest USD pullback from multi-month top limits gains.
  • The uptick in Oil prices underpins commodity-linked CAD.
  • The fundamental backdrop supports prospects for an extension of the bullish trajectory.