USD/CAD Outlook: Rising Rate Cut Odds Send Loonie Lower

• Canada’s economy expanded slower than expected in Q1.

• The likelihood of a Bank of Canada rate cut in June rose from 66% to 83%.

• The US core PCE price index increased by a slower 0.2% in April.

The USD/CAD outlook turned bullish on Monday as the Canadian dollar weakened amid an increase in Bank of Canada rate cut expectations. At the same time, the dollar recovered after dipping on Friday due to a slowdown in US inflation.

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Data on Friday revealed that Canada’s economy expanded slower than expected in Q1, boosting expectations for a Bank of Canada rate cut this week. Notably, Canada’s economy expanded by 1.7%, which was well below the forecast of 2.2%. As a result, the likelihood of a rate cut in June rose from 66% to 83%. This means Canada’s interest rates will start declining well before those in the US, creating a gap in interest rates.

Meanwhile, the US dollar recovered from a plunge on Friday when inflation data came in lower than expected, raising chances that the Fed will cut in September. The core PCE price index rose by 0.2% in April, below economists’ expectations for a 0.3% increase. This was the second lower surprise in May that led to a decline in the dollar. After the report, the likelihood of a Fed rate cut in September increased slightly from 49% to 53%. 

However, there is still much uncertainty regarding the Fed’s policy path. Policymakers are awaiting more evidence that inflation will decline to the central bank’s target, so they have remained mostly cautious. 

USD/CAD key events today

• US final manufacturing PMI
• US ISM manufacturing PMI

USD/CAD technical outlook: Bulls test 30-SMA resistance within bearish channel

On the technical side, the USD/CAD price is rebounding after finding support at the 1.3605 level. Bulls have regained momentum, with the RSI slightly above 50, and are challenging the 30-SMA resistance. A break above the SMA would confirm a shift in sentiment to bullish. 

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However, since the price is also trading within a shallow bearish channel, a move higher would likely pause at the 1.3720 level or the channel resistance. If the larger bearish trend continues, the price will bounce lower at the channel resistance. However, if bulls are ready to reverse the trend, the price will break out of the bearish channel to make a higher high.

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