Sep 06, 2023

The United States dollar vs Canadian dollar pair have interest rate and service data ahead at a key resistance level.

USDCAD Daily Chart

USDCAD: Daily Chart

USDCAD is trading at resistance near the 1.3650 level ahead of the latest data. With markets confident that they have the Bank of Canada’s plan figured out, the US ISM is likely to be the driver of near-term direction.

Economists project that the US services PMI will be 52.5 in February, close to the previous month’s 52.7. However, ING believes that recent data points to a slowdown in GDP growth.

The US manufacturing sector has contracted for ten consecutive months, falling below the 50-point mark that indicates expansion. Construction spending has remained strong, while the ISM services index is expected to post a headline reading consistent with an economic growth rate of closer to 1% year-on-year, rather than the 2.5% rate seen in the second quarter. Like the jobs report last week, the ISM indices suggest that there will be little need for further interest rate hikes in the US to cool the economy.

The Bank of Canada is widely expected to hold its key interest rate steady at 5% on Wednesday, as the contraction in second-quarter GDP and the flat estimate for July have solidified expectations for a rate pause, with some even predicting that the bank will end its rate hiking cycle altogether.

The Canadian economy contracted by 0.2% in the second quarter, well below the Bank of Canada’s forecast of 1.5%, and economists’ expectations of 1.2%. First-quarter growth was also revised downward to 2.6%.

“We had anticipated to see signs of a slowdown in Canada, but these figures were shockingly weak,” wrote Jay Zhao-Murray, an analyst at Monex Canada.

Money markets have virtually eliminated the risk of a September rate hike, and the odds of a hike at any point by year-end have been slashed to one in three. With economists certain of a rate pause, the US services data will be the key indicator, and a stronger number could push the USD through the resistance level.

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