They extended their gains on Monday after a strong report that only contributed to the view that the Federal Reserve would be in no rush to ease policy following Friday’s strong jobs data.
The economic data calendar will be a bit light this week, but as markets continue to reprice US interest rates, this should keep the dollar supported in any near-term declines until something fundamentally changes.
This week, it is among the top currency pairs to watch.
In addition to the rise in the US dollar, the USD/CAD pair has been supported by the sharp sell-off we saw last week, and the US dollar is likely to remain a focus following Friday’s strong US jobs report.
The Canadian dollar will remain the focus ahead of the country’s jobs report on Friday.
Powell, FOMC and data paint a bullish story for the US dollar
There is little justification for investors to start shorting the US at this early stage following a strong jobs report on Friday and a better-than-expected ISM services PMI report on Monday.
In particular, the jobs report has all but ended discussions of an early rate cut.
The dollar’s strong performance in recent days follows its rather strange reaction last week following the .
Despite expectations that investors would refrain from selling dollars after a hawkish Federal Reserve meeting, they did so.
But they couldn’t justify doing so this time, as the strong jobs report meant there was a commitment from dollar bulls this time around, especially when Powell admitted on Sunday that the Federal Reserve is cautious about cutting rates. of interest too soon.
In an interview broadcast Sunday night, Powell said:
“The danger of acting too soon is that the job isn’t quite done and that the really good readings we’ve had over the last six months somehow turn out not to be a true indicator of where inflation is headed.”
He added that,
“The prudent thing to do is just give it some time and see that the data continues to confirm that inflation is coming down to 2% on a sustainable basis.”
US jobs report was very positive and ISM was stronger
Powell’s interview was conducted a day before the January jobs report was released.
The data demonstrated widespread strength in the labor market, prompting investors to shift out of bonds and into the dollar on Friday as the headline beat expectations at 335,000.
Meanwhile, it grew at a strong pace of 0.6% month on month.
The dollar’s bullish trend is unlikely to reverse unless there is now a significant deterioration in US data.
The prevailing belief in an imminent rate cut by the Federal Reserve disappeared when the March cut was reduced to around 20% before falling to around 15% on Tuesday.
This followed Monday’s release of stronger ISM Services PMI data, which came in at 53.4 compared to the expected 52 and 50.6 previously.
So fundamentally, there is little reason to hinder the US dollar’s rally.
Therefore, currency pairs like USD/CAD could see further gains as we progress into the week. The US Dollar Index was now above the December high of 104.26.
USD/CAD Analysis: Key Data to Watch for the Canadian Dollar
Considering the relatively light calendar week of economic data for the US data, the renewed USD strength is expected to keep the dollar bears at bay, keeping USD/CAD supported.
Key data releases relevant to USD/CAD for this week are listed below, with the highlight being the monthly Canadian employment report.
USD/CAD Technical Analysis
USD/CAD closed the Friday session with a bullish engulfing candle, similar to many other USD pairs, before showing some continuation on Monday.
The rally meant that USD/CAD would now break above the previous resistance zone around 1.3500, or more specifically in the range between 1.3480 and 1.3500.
Here, previous support and resistance meet the 200-day average and a downtrend line, all of which are now broken following the extension of Monday’s rally.
In light of the two-day rally and a bullish breakout, upside from here seems more likely than a bearish reversal. I believe the stage is set for a continuation of the rally to the December high of 1.3620, and potentially beyond.
In terms of support, the 1.3480-1.3500 area is now the first line of defense for the Bulls. However, even if rates fell a little below this zone, this would not worry the bulls too much.
But in case of a break below the most recent low around the 1.3380 support area, then that would be a bearish development. So the line in the sand for me is around 1.3380.
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