USD/CAD faces pressure amid surge in oil

Key Movers

The US dollar index (DXY) initially gained ground today, but later declined to trade below the 106.3 mark. Last week, initial jobless claims increased to 204,000 which was lower than anticipated, indicating a robust labor market. Additionally, second-quarter gross domestic product (GDP) growth was confirmed at 2.1%. Conversely, US corporate profits only rose by 0.5% falling short of expectations. The US Federal Reserve, in its recent decision, maintained interest rates without changes but signalled the possibility of another rate hike before the year’s end and fewer rate cuts than previously indicated for the following year. Several subsequent comments from Fed officials reinforced the likelihood of further rate hikes. Investors are eagerly awaiting a speech from Federal Reserve Chair Jerome Powell, scheduled later today.

The euro traded around 1.055 today, near its lowest point since December of last year. The EUR is facing pressures from a strong US dollar due to the Fed’s hawkish stance and the expectation of prolonged higher interest rates in the United States. Concurrently, inflation trends in the Eurozone presented a mixed picture. Germany experienced a slightly more significant slowdown in inflation than anticipated, reaching its lowest level since the Ukraine conflict began, while Spain saw inflation accelerate for the third consecutive month. Currently, the market sentiment is leaning towards the belief that the European Central Bank (ECB) will refrain from further interest rate hikes this year, although interest rates are expected to remain elevated for an extended period.

The pound rebounded to trade above the 1.22 level after finding support around 1.21 due to a slight correction in the US dollar, which boosted the attractiveness of assets sensitive to risk. The GBP/USD pair had been under pressure earlier this year as investors were shedding assets considered riskier in response to cautious market sentiment. However, the outlook for the pair remains precarious as concerns of a recession in the UK have risen due to fragile economic prospects. Both the UK’s Manufacturing and Services Purchasing Manager’s Index (PMI) have dipped into contraction territory while the robust demand for labor appears to be waning.