USD/CAD started the day on a weak note but quickly recovered after the release of US PMI data in May, showing a higher-than-expected reading. The Services PMI beat expectations, which is crucial for interest-rate expectations as the sector was highlighted by the Fed as an inflation hotspot. This positive data has given a boost to the US Dollar and in turn, to the USD/CAD pair.
The US S&P Global Manufacturing PMI for May came out at 50.9, higher than April’s 50.0 and economists’ forecast of 50.0. Additionally, the Services PMI rose to 54.8 from 51.3 in the previous month, beating both expectations and previous readings. The Composite PMI also showed an increase to 54.4 in May from 51.3 in April, outperforming economists’ expectations of 51.1. These strong figures have supported the USD, particularly in light of the Fed’s focus on cooling down Services-sector inflation before considering an interest rate cut.
USD/CAD had been trading lower prior to the release of the PMI data due to various factors such as higher Crude Oil prices, positive risk appetite, and technical chart resistance. However, after the data came out, the pair managed to climb back up and recover a significant portion of its losses. The Canadian Dollar may see limited upside against the US Dollar as interest rate differentials remain favorable for the USD. Recent Canadian inflation data showed cooling price pressures, bringing the likelihood of a Bank of Canada interest rate cut closer.
On the other hand, the Fed has been delaying an expected interest rate cut, with the Minutes from the April-May meeting indicating that policymakers are looking to keep rates unchanged at least until September. There were even discussions about the possibility of increasing rates depending on the evolution of the labor market. This divergence in monetary policy between the Bank of Canada and the Fed is likely to support the USD/CAD pair as interest rate expectations play a key role in currency movements.
Looking ahead, the Bank of Canada is expected to cut interest rates either in June or July, while the Fed is unlikely to make any moves until September at the earliest. This divergence in interest rate expectations is likely to continue to impact the USD/CAD pair, with the potential for further upside in favor of the US Dollar. Traders will be closely watching economic data releases and central bank policy decisions for further clues on the future direction of the pair.
