The USD/CAD pair is grappling to hold ground after rebounding from a five-month low of 1.3498, recorded on Monday. The US Dollar depreciated due to Fed Chair Powell’s dovish speech at the Jackson Hole Symposium, leading to increased risk aversion. However, the commodity-linked CAD may advance further due to higher crude oil prices.
USD/CAD rebounds from its five-month low of 1.3498, currently hovering around 1.3510 during the early European session on Monday. This upside could be attributed to the improved US Dollar (USD) amid increased risk aversion. However, the Greenback may receive downward pressure from the rising odds of a Federal Reserve (Fed) rate cut in September.
Fed is highly expected to deliver at least a 25-basis point rate cut in September. According to the CME FedWatch Tool, markets are now fully anticipating at least a quarter-basis point (bps) rate cut by the Federal Reserve at its September meeting.
At the Jackson Hole Symposium on Friday, Fed Chairman Jerome Powell remarked, “The time has come for policy to adjust.” While he did not provide specific details on the timing or scale of potential rate cuts, Powell highlighted that risks in the job market have risen, whereas inflation risks have diminished.
The commodity-linked Canadian Dollar (CAD) received support from the higher crude oil prices. West Texas Intermediate (WTI) price extends its gains for the third consecutive day, trading around $75.20 per barrel at the time of writing. Crude oil prices appreciate due to rising supply fears over geopolitical tensions in the Middle East.
Hezbollah launched hundreds of rockets and drones into Israel on Sunday, prompting a response from the Israeli military, which deployed around 100 jets to strike Lebanon in an effort to prevent a larger assault. This escalation heightens concerns that the ongoing Gaza conflict could expand into a broader regional conflict, potentially involving Hezbollah’s supporter, Iran, and Israel’s primary ally, the United States, according to Reuters.
However, the dovish stance of the Bank of Canada (BoC) regarding its policy outlook may limit the upside of the CAD and underpin the USD/CAD pair. The BoC has already commenced its cutting cycle to address growth concerns and a moderating labor market domestically.
Analysis:
The USD/CAD pair is facing volatility due to the ongoing geopolitical tensions and the expectations of a Fed rate cut in September. While the CAD may benefit from higher crude oil prices, the USD is under pressure from the dovish stance of the Fed. Investors should closely monitor the Fed’s decisions and geopolitical developments to gauge the future direction of the USD/CAD pair.