The USD/CAD pair is trading around 1.3635 in the early European session on Tuesday, with the US Dollar weakening due to the potential September rate cut from the Fed. The pair remains bearish below the 100-period EMA on the 4-hour chart, supported by the bearish RSI momentum indicator. The path of least resistance appears to be to the downside, with the first support level at 1.3600 and the first resistance level at 1.3650. A breach of the support level could lead to a drop to 1.3556, while a break above the resistance level could pave the way for a rally towards 1.3672.
Key factors driving the Canadian Dollar include interest rates set by the Bank of Canada, the price of Oil, the health of the Canadian economy, inflation, and the Trade Balance. Market sentiment, particularly risk-on behavior, can also impact the CAD, as well as the health of the US economy, Canada’s largest trading partner. The BoC plays a significant role in influencing the CAD through interest rate decisions and quantitative easing or tightening measures.
The price of Oil is crucial in determining the value of the Canadian Dollar, as Canada’s largest export. Typically, when Oil prices rise, the CAD also strengthens due to increased demand for the currency. Conversely, a decline in Oil prices can lead to a decrease in the CAD value. Higher Oil prices can also result in a positive Trade Balance, which is supportive of the CAD.
Inflation, which has traditionally been viewed as negative for a currency, can actually have a positive impact in modern times due to increased cross-border capital flows. Higher inflation may prompt central banks to raise interest rates, attracting more capital inflows and boosting demand for the local currency, such as the Canadian Dollar. Macroeconomic data releases, such as GDP, PMIs, employment, and consumer sentiment surveys, also influence the direction of the CAD. A strong economy can attract foreign investment and lead to higher interest rates, strengthening the currency, while weak economic data may cause the CAD to depreciate.
