USD/CAD Outlook: Gaining on Debt Ceiling Optimism, Labor Data

• Investors expect higher rates for longer due to optimism around the US debt ceiling.

• There is ongoing strength in the US labor sector.

• The BOC governor believes consumer prices will continue to decrease.

Today’s USD/CAD outlook is bullish. Optimism surrounding debt ceiling negotiations in Washington bolstered expectations of higher US interest rates for longer, resulting in a stronger dollar on Friday. 

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Democratic negotiators emphasized their commitment to reaching a timely agreement that prevents a US default. This positive development occurred just days after Biden and top US congressional Republican Kevin McCarthy underscored their shared determination to secure a deal. These reduced concerns of an unprecedented and economically devastating default. As a result, investors expect higher rates for longer.

Simultaneously, data revealing a persistently tight labor market contributed to the growing anticipation of another rate hike. The number of citizens in the US filing new claims for unemployment benefits declined beyond expectations last week, indicating ongoing strength in the labor sector. 

On Thursday, the Canadian dollar lost strength against its US counterpart due to a decline in oil prices. Additionally, Bank of Canada Governor Tiff Macklem refrained from endorsing the recent market speculation of another interest rate hike. 

Following the release of the BoC’s financial system report, Macklem stated that April’s inflation rises, which marked the first increase in 10 months, was an anomaly. He further expressed his belief that consumer prices would continue to decrease.

As a consequence of Macklem’s comments, money markets adjusted their expectations. Before his statement, there was an 80% probability of the central bank resuming interest rate hikes by July. However, this likelihood decreased to approximately 60%. 

USD/CAD key events today

Investors will receive retail sales data from Canada showing consumer spending is faring amid high-interest rates. They will also pay attention to a speech from Fed Governor Jerome Powell.

USD/CAD technical outlook: Clash for dominance at the 30-SMA.

On the 4-hour chart, bears and bulls show almost equal strength as the price chops through the 30-SMA. Bulls have been in control of the move from the 1.3349 support level as the price traded above the 30-SMA with the RSI above 50.

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However, bears came in for a retracement at the 1.3350 resistance level. Since then, they have challenged the 30-SMA support, although bulls also hold on to control. If bears fail, we might see a break above the 1.3550 resistance.

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