• The Bank of Canada became the first G7 central bank to lower interest rates.

• Markets are expecting 77 basis points of rate cuts in Canada this year.

• The likelihood of a Fed rate cut in September rose to 69%.

The USD/CAD outlook is optimistic as the loonie remains fragile after the Bank of Canada implemented its first rate cut in four years. The dollar was also weak after mixed US data but gained against the Canadian dollar.

The Bank of Canada on Wednesday became the first G7 central bank to lower interest rates. The central bank cut rates by 25 basis points as expected, diverging from the Federal Reserve. This has created an interest rate differential that is weighing on the Canadian dollar.

More rate cuts from the Bank of Canada will likely leave the currency more vulnerable. Markets are expecting 77 basis points of rate cuts in Canada this year. This is a more significant figure than the Fed’s 50 basis points. Moreover, the likelihood of a first Fed cut in September still fluctuates with incoming data. Therefore, there is no certainty when rates will start declining in the US.

Elsewhere, data revealed growth in Canada’s service sector in May. The business activity index rose from 49.3 in April to 51.1. If Canada’s economy returns to growth, the BoC might become more cautious about future rate cuts.

Meanwhile, data from the US was mixed. The service sector grew, while private employment revealed softness in the labor market. Still, the likelihood of a Fed rate cut in September rose to 69%. The market focus is now shifting to the upcoming nonfarm payrolls report.

USD/CAD key events today

• US unemployment claims

USD/CAD technical outlook: Bulls fail to complete a channel breakout

On the technical side, the USD/CAD price trades above the 30-SMA with the RSI above 50, supporting a bullish bias. However, it still trades within a shallow, bearish channel. The price recently made a sharp bullish move that punctured the channel resistance and the 1.3720 level.

However, the bulls were not strong enough to maintain the move and break out of the channel. Consequently, the price retreated to retest the 30-SMA support. Nevertheless, if the SMA holds firm as support, the price might make another attempt at breaking above the channel resistance. However, if it gives way, bears will revisit the channel support.

https://www.forexcrunch.com/blog/2024/06/06/usd-cad-outlook-boc-rate-cut-leaves-loonie-vulnerable/