USD/CAD struggles to gain ground as Fed’s Powell turns dovish on interest rate outlook

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The USD/CAD pair struggles for a firm-footing during the Asian session on Monday after sliding almost 0.8% to near 1.3820 on Friday.

USD/CAD remains under pressure as Fed’s Powell signals that he is open to monetary policy adjustments.
Fed Powell’s dovish interest rate guidance has battered the US Dollar.
Investors await US Durable Goods, PCE inflation, and Canada’s GDP data.

The USD/CAD pair struggles for a firm-footing during the Asian session on Monday after sliding almost 0.8% to near 1.3820 on Friday. The Loonie pair stays under pressure as comments from Federal Reserve (Fed) Chair Jerome Powell in his speech at the Jackson Hole (JH) Symposium on Friday signaled that he is open to unwinding monetary policy restrictiveness, citing downside employment risks.

During the Asian session, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades slightly higher. Still, the DXY is close to its almost four-week low below 98.00.

"Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance," Powell said. He acknowledged rising downside employment risks, while risks to inflation remain tilted to the upside.

According to the CME FedWatch tool, there is an 87% chance that the Fed will cut interest rates in the September monetary policy meeting,

This week, investors will focus on the United States (US) Durable Goods Orders, and Personal Consumption Expenditure Price Index (PCE) data for July.

In Canada, investors will pay attention to the June’s and Q2 Gross Domestic Product (GDP) data, which will be published on Friday. The Canadian economy is estimated to have expanded 0.1% in June after declining by the same pace in May.

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.