• The flash US Composite Output Index jumped from 51.3 to 54.4.

• Canada’s inflation hit a three-year low of 2.7%.

• The prospect of higher rates for longer in the US weighed on oil.

The USD/CAD outlook points northward as the pair holds near a two-week high on growing policy divergence between the US and Canada. At the same time, the Canadian dollar was weak due to a decline in oil prices.

The divergence in policy outlooks between the Fed and the Bank of Canada was highlighted on Thursday when the US released upbeat PMI data. Business activity improved significantly in May. Notably, the flash US Composite Output Index jumped from 51.3 to 54.4, leading to a decline in Fed rate cut expectations. If the economy is doing so well, demand is still high, which might lead to further delay in rate cuts.

The recent FOMC policy meeting minutes revealed that some policymakers were ready to hike interest rates if inflation remains stubborn. Therefore, any signs of strong demand that could drive inflation raises uncertainty regarding future policy moves.

Meanwhile, the situation in Canada is different because inflation hit a three-year low of 2.7%, raising bets that the Bank of Canada will cut rates in June. Furthermore, experts have said there might be three cuts in Canada before the Fed starts its rate-cutting cycle. Therefore, the longer it takes for the Fed to start, the more the Canadian dollar will weaken.

Elsewhere, oil prices fell, putting more downward pressure on the loonie. The prospect of higher rates for longer in the US is bearish for oil prices. Therefore, the positive PMI data also affected oil.

USD/CAD key events today

• Revised University of Michigan consumer sentiment

USD/CAD technical outlook: Bullish breakout

On the technical side, the USD/CAD price has made a bold, bullish step by breaking above a solid resistance trendline. The bullish bias has strengthened as the price sits far above the 30-SMA, and the RSI is near the overbought region.

The break above the trendline marks a solid shift in sentiment to bullish. However, the price must break above the 1.3750 resistance to confirm a new bullish trend to make a higher high. This would allow it to retest the 1.3800 level. However, the price might pull back to retest the recently broken trendline before rising higher.

https://www.forexcrunch.com/blog/2024/05/24/usdcad-outlook-policy-outlook-divergence-weakens-loonie/