The USD/CAD currency pair experienced a downward shift below the significant support level of 1.3600 during the early European session. This decline in the Loonie’s value was primarily due to the reduced appeal of the US Dollar Index (DXY).
The DXY lost its attractiveness following US President Joe Biden’s decision to scale down the proposed spending initiatives in the budget, as well as his call to raise the borrowing cap limit in order to avoid default.
Treasury Secretary Janet Yellen had already warned Congress that the federal government could default on its payments by June 5.
In early Asian trading, S&P500 futures gave up a substantial portion of their early gains after President Biden announced that an agreed deal on the US debt ceiling was being presented to Congress.
As a result, investors adjusted their positions in US equities, considering that US markets would be closed on Monday for Memorial Day.
Despite the possibility of further tightening of the Federal Reserve’s policies, the US Dollar Index (DXY) struggled to gain strength. It touched a daily low of 104.11, retracting from its previous level of 104.20.
The financial markets anticipated more interest rate hikes from the Federal Reserve following a rebound in consumer spending by US households.
After vigorous negotiations between White House officials and the team led by House of Representatives’ Kevin McCarthy, an agreement was reached in early Asian trading.
President Biden agreed to reduce the scale of spending initiatives proposed in the budget to raise the US debt ceiling limit. This two-year approval for the $31.4 trillion borrowing limit alleviated fears of a default situation for the US economy.
While the White House agreed to cut spending in the budget, it remained firm on preserving health coverage and preventing an increase in poverty.
It is important to note that an increase in the US debt ceiling could lead credit rating agencies to downgrade the long-term credibility of the US economy. This could have a significant impact on the US Dollar Index (DXY) and US equities.
Last week, expectations for a pause in the Federal Reserve’s policy-tightening measures were strong following comments from Federal Reserve Chair Jerome Powell. He stated that additional rate hikes were less appropriate due to the tight credit conditions faced by regional banks, which were exerting considerable pressure on inflation.
Businesses have been struggling to obtain credit to meet their working capital requirements, resulting in reduced production capacity. However, recent data on the US Personal Consumption Expenditure (PCE) Price Index for April showed that household spending remained resilient despite the higher cost of living.
Both the monthly headline and core PCE Price Index increased by 0.4%, surpassing market expectations. Additionally, US Durable Goods Orders data expanded by 1.1%, contrary to the anticipated contraction of 1.0%. These new figures support the argument for more interest rate hikes by the Federal Reserve.
This week, the Canadian Dollar is expected to be highly active as the Gross Domestic Product (GDP) data is set to be released on Wednesday. According to the preliminary report, the monthly GDP for March is projected to contract by 0.1% compared to the previous expansion of 0.1% recorded in February.
On the other hand, Q1 and annualized GDP are expected to see significant growth of 0.4% and 2.1%, respectively, compared to stagnant performance previously. If the Canadian economy demonstrates resilience, Bank of Canada (BoC) Governor Tiff Macklem might consider resuming interest rate hikes.
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