As US Dollar bounce back, USD/CAD recovers further to near 1.3260

Highlights

• The USD/CAD has rebounded to nearly 1.3260, following the US Dollar’s lead.
• The Federal Reserve may begin reducing interest rates as early as March 2024.
• The Canadian Dollar has been affected by lower oil prices resulting from the resumption of trade in the Red Sea.

The USD/CAD pair rose to nearly 1.3260 during the early New York session after rebounding from the critical support level of 1.3180. The Canadian dollar gained significant support due to a decent recovery in the US Dollar Index (DXY) and a sharp sell-off in oil prices.

The S&P500 is expected to open flat, indicating a subdued market sentiment. Trading activity is thin due to the festive mood. The USD Index has risen to almost 101.40, although the overall sentiment remains bearish as investors anticipate an earlier-than-expected interest rate cut by the Federal Reserve (Fed).

According to the CME Fedwatch tool, there is a 73% chance that the Fed will lower interest rates by 25 basis points to 5.00-5.25%. The tool also predicts a 72% probability of further rate cuts in May.

The Federal Reserve may be compelled to endorse rate cuts due to loosening labour market conditions in the US economy, in addition to easing price pressures. The US Department of Labour reported higher-than-expected Initial Jobless Claims (IJC) for the week ending December 22. The number of individuals claiming jobless benefits was 218K, which is higher than the consensus of 210K and the previous reading of 206K.

On the Canadian Dollar front, the resumption of commercial shipment activities along the Red Sea route has led to lower oil prices, which has dampened demand for the Canadian Dollar. It is important to note that Canada is the leading exporter of oil to the United States, and lower oil prices have an impact on the Canadian Dollar.