USD/CAD trades higher around 1.3800, Fed policy in focus
- USD/CAD moves slightly higher to near 1.3800 ahead of the Fed’s monetary policy decision.
- The Fed is expected to keep borrowing rates steady in the range of 4.25%-4.50%.
- Investors await the Canadian employment data for April, which will be released on Friday.
The USD/CAD pair rises to near 1.3800 during European trading hours on Wednesday. The Loonie pair gains as the US Dollar (USD) edges up ahead of the Federal Reserve’s (Fed) interest rate decision at 18:00 GMT.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks higher around 99.50.
Traders are increasingly confident that the Fed will keep interest rates steady in the current range of 4.25-4.50% for the third meeting in a row. The reasoning behind firm Fed dovish bets is heightened uncertainty over the US economic outlook under the leadership of President Donald Trump.
US business owners have indicated that they will pass on the impact of higher tariffs imposed by President Trump to consumers, a scenario that will result in a resurgence in consumer inflation.
Market sentiment turns favorable for equities across the globe as the United States (US) and China have agreed to trade talks this week in Switzerland. However, the trade deal between them is unlikely to happen anytime soon, as US Treasury Secretary Scott Bessent has indicated that the meeting will be more about de-escalating the trade war before moving forward. “My sense is that this will be about de-escalation, not about the big trade deal,” Bessent said, according to CNBC.
Meanwhile, a high-stakes press conference between US President Trump and Canadian Prime Minister Mark Carney has escalated trade tensions between the two nations. Trump referred to Canada as merely the “largest client” and indicated that the nation relies heavily on trade with Washington.
On the economic front, investors will pay close attention to the Canadian labor market data for April, which will be released on Friday. The employment data will significantly influence the outlook of the Canadian Dollar (CAD).
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.