USD/CAD Momentum Takes a Pause Despite Hawkish Outlook

With the US Bureau of Labor Statistics on deck later this week for upcoming nonfarm payrolls, only one obstacle still remains in the Federal Reserve’s way when it comes to adjusting rates at the upcoming FOMC Meeting. In keeping with the Federal Reserve’s dual mandate, the Central Bank targets maximum employment alongside medium-term inflation of 2.00%. While last week’s data pertaining to Personal Consumption Expenditure Price Index (PCE inflation) came in just below the target, the gradual trend higher shows that inflation is meeting expectations of officials.

After meeting one of two mandates, employment is the big looming question that could adjust market sentiment ahead of the next monetary policy decision. Even though policymakers have highlighted the prevailing sense of hawkishness in recent policy speeches, without stable and consistent job creation during the month of February, the Federal Reserve may be left with a shakier case for action. With the blackout period preceding the decision already in play, the institution’s stated data dependency will be the guiding force of the US dollar in the absence of remarks from the Central Bank or Federal Government.

Dollar Pulls Back From Recent Optimism

A speech from Federal Reserve Chairwoman Janet Yellen on Friday all but sealed the fate for the upcoming decision due from the FOMC. During her remarks, she pointed out that “we currently judge that it will be appropriate to gradually increase the Federal Funds rate if the economic data continue to come in about as we expect.” The meeting, scheduled for March 14th and 15th is expected to result in a 25 basis point rate hike, bringing the benchmark from 0.75% to 1.00%. Federal Funds futures as tracked by the CME Group currently indicate an 86.40% probability (as of March 6th, 2017) of this action during the next monetary policy meeting.

This growing likelihood spurred a significant rally in the US dollar throughout the week before the currency corrected late on Friday’s session. However, now that the dust has settled a little, traders are cautious towards the US dollar with the rate hike already largely priced-in. Employment data due later this week may shed a little light on the Federal Reserve’s willingness to raise rates, however, no major policy speeches will come due until after the decision, suggesting that market participants should focus on data. Any major disappointment from payrolls could shift sentiment, causing the US dollar to fall.

However, even absent a disappointing employment reading from the Bureau of Labor Statistics on Friday, the dollar trajectory higher may not be assured.  Although typically a local currency appreciates in tandem with rising rates, the US dollar faces growing pressure from the Trump Administration which is seeking a competitive dollar to help bolster trade. Furthermore, the last two times that the Federal Reserve raised rates, following the dollar buildup to the decision, the aftermath resulted in a steep depreciation. Should this next more trigger a similar reaction, the dollar may have bullish momentum for another week and change before reversing lower even if the policy decision is more hawkish.

US Dollar Rally Stalls Against Canadian Peer

Amid the pickup in bullish dollar sentiment, the US currency faced some resistance in the end of last week. Although the Canadian GDP report came in positive, the deceleration in growth was not an outwardly positive development, meaning that monetary accommodation in the form of low rates will likely remain in place for the foreseeable future. The widening gap between interest rates in Canada and the United States over time may bode well for USD relative to CAD, however, one of the critical components is energy prices. The USD/CAD pair is particularly sensitive to sudden changes in the energy pricing environment.

What Binary Options Traders Should Watch For

Based on the importance of the upcoming employment reading, Wednesday’s figure from private payroll processor ADP could give an early indication of the pace of job creation in the United States. Although consensus is expecting the ranks of the unemployed to have risen by 190,000 back in February, should job creation remain above 100,000-120,000, it could lend further credibility to the Fed’s more hawkish viewpoint. However, any significant miss of expectations could change the calculus for traders, leading to reduced speculation of an imminent rate hike.

If everything remains positive, the US dollar may continue to rally against the Canadian dollar leading up to the FOMC interest rate decision next week.  However, it is worthwhile to recall US dollar performance after the last few rate hikes to put the price action in a historical context. Even though higher interest rates typically result in bullish US dollar momentum, USD/CAD may retreat following the decision as market participants question the Fed’s ability to continue tightening policy for the foreseeable future.