The USDCAD pair has responded to recent economic data. The USD fell after a weaker-than-expected Non-Farm Payroll (NFP) report. This report led the market to expect a 60 basis points (bps) rate cut by the end of the year, up from the prior expectation of 35 bps. Federal Reserve officials hinted at a possible rate cut in September, which has increased traders’ expectations. The ISM Services PMI reached a new high for prices, making traders cautious ahead of the upcoming US Consumer Price Index (CPI) release. Investors are also looking forward to the US Jobless Claims data and the Canadian employment report for more insights on economic conditions.

Canadian Economic Conditions

In Canada, inflation is near the upper limit of the target range, supported by strong economic data, including a solid employment report. The Bank of Canada (BoC) kept interest rates unchanged but may adjust them based on economic growth projections. Markets anticipate a 18 bps rate cut in Canada by year-end. On the daily chart, USDCAD has rejected the 1.3860 level and is holding lower as traders await new data. The 4-hour chart shows the price consolidating between 1.3760 and 1.3815, with buyers targeting the upper end and sellers aiming for a drop to 1.37. Similarly, the 1-hour chart shows buying and selling interests within this range. The USD fell after last week’s weaker Non-Farm Payrolls report, which indicated a gain of only 155,000 jobs. This changed expectations around the Federal Reserve’s actions, leading to a significant shift towards a probable rate cut in September, with Fed funds futures indicating a nearly 90% chance. Meanwhile, Canada’s economy looks more robust. The July CPI data remained steady at 2.9%, with core inflation staying high near the top of the Bank of Canada’s target range. This came after a strong Canadian jobs report last month, which added 45,000 jobs and exceeded expectations. This contrast is likely to put downward pressure on the USDCAD pair. The rejection of the 1.3860 level last week was notable, and sellers may see a return to that area as an opportunity. A drop below recent lows could lead to a move toward the 1.3500 mark in the coming weeks.

Trading Strategies

For traders dealing in derivatives, buying put options may be an appealing strategy, especially with strike prices below the current consolidation range, like 1.3700 or 1.3650. Another option is to sell call spreads, placing the short leg around the 1.3860 resistance level. This approach could benefit from both a price drop and time decay if the pair remains stable. The main risk to this outlook is the US Consumer Price Index (CPI) report due next week. The recent ISM Services PMI showed a concerning rise in its prices paid index to the highest level this year. A strong inflation report could undermine expectations for a September rate cut and drive USDCAD sharply higher. We observed a similar rapid shift in late 2023 when the market aggressively priced in Fed cuts, only to reduce those expectations early in 2024. This illustrates how quickly market sentiment can change based on a single report. Traders should remain flexible and recognize that the current narrative is unstable. In the short term, USDCAD is trading in a tight range between 1.3760 and 1.3815. Tomorrow’s US Jobless Claims and Friday’s Canadian employment report will be important catalysts. A weak US number paired with a strong Canadian report could finally break the pair out of this consolidation to the downside. Create your live VT Markets account and start trading now.

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