USD/CAD declines modestly, all attention is directed to key events

• USD/CAD is lower as traders await Fed Chair Jerome Powell’s testimony before the US Senate on Tuesday.
• The pair is dominated by the US Dollar as the Canadian data calendar remains eventless until next week.
• Markets continue to be pricing in a US interest rate cut by the Federal Reserve in September, which could be negative for USD/CAD.

He USD/CAD The dollar is up on Tuesday, trading at 1.3640, as it continues to consolidate in a limited range over the past three months. Most of the emphasis is on the US Dollar side of the pair, as traders await Federal Reserve (Fed) Chairman Jerome Powell’s testimony before the Senate Banking Committee, while Canada has no macroeconomic events scheduled until the release of building permits on Friday.

Fed Chair Powell is expected to strike a conservative line in his Senate testimony on Tuesday, more or less repeating the message he gave when he spoke at the central bankers’ meeting in Sintra. There he softened his stance on relying strictly on data, admitting that there were now welcome signs that inflation was falling, but that more evidence was needed to establish that it was significant and sustainable. As such, he is expected to keep markets guessing about the timing of the Fed’s next policy move.

Markets are less ambivalent. Market-based odds of the Fed cutting interest rates by 0.25% to an upper range of 5.25% at the September Fed meeting have risen steadily over the past two weeks amid a compounding negative effect from a series of not-so-good data releases. Most recently, the ISM services PMI data for June fell into contraction territory, and labor market data for the same month showed the unemployment rate rose to 4.1% – the third consecutive monthly increase. Although Nonfarm Payrolls beat expectations by 190,000 by recording 206,000 new jobs, the previous month was revised sharply lower.

Inflation data has also come out generally on the downside. In the NFP report, average hourly earnings were unchanged from May and exactly in line with expectations. Before that, the Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred measure of inflation, edged down to 2.6% for both headline and core inflation in May. Before that, the Consumer Price Index (CPI) data for May showed prices fell more than expected to 3.3% and core inflation was also lower than expected at 3.4%. While both PCE and CPI are still above the Fed’s 2.0% target, they are moving in the right direction.

As for Canadian data, its labour market appears to be suffering more than the US one, as revealed in the Canadian version of the NFP report also released on Friday. This showed that the unemployment rate rose to 6.4%, beating forecasts of 6.3% and marking its highest level since January 2022. Canadian payrolls fared even worse, showing a drop of 1,400 when economists were expecting an increase of 22,500. The tensions in the labour market have been attributed to still-high interest rates in Canada, which hamper businesses’ ability to access credit. This has led to further calls that the Bank of Canada (BoC) should cut interest rates again, after they cut the policy rate by 0.25% to 4.75% in June – the first change in interest rates since July 2023.

Since lower interest rates or the expectation of them are generally negative for a currency, all eyes will be on Powell’s comments and when the Fed will make its first move. Otherwise, the Canadian dollar looks more vulnerable as the BoC weighs further rate cuts to stimulate its weakened labor market.