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FX Forecasts

The Markets Are Pricing Back in a September Rate Cut by the Fed, Shaving Some Value off the Greenback

July 11, 2024
Jimmy Jean, Vice-President, Chief Economist and Strategist • Hendrix Vachon, Principal Economist


  • The US economy has slowed, and inflation once again appears to be improving. The ISM Services PMI has slipped below 50, suggesting that the economic slowdown is becoming more broad−based. The job market also shows signs of slackening, including an uptick in the unemployment rate. That said, it's not all bad news for the US economy. The country continues to create about 200,000 jobs each month, and real GDP growth isn't expected to fall much below 2%. But the slower pace of economic growth could well be enough to gradually tamp down inflation and give the Federal Reserve (Fed) room to cut rates. Financial markets recently priced back in an initial rate cut in September, which has helped nudge down the US dollar.
  • There's also been a lot going on politically. The major currencies were caught between the European elections and the escalating political death match in the United States. Joe Biden's abysmal performance in the June 27 debate forced investors to think about what the US economy could look like next year if Donald Trump comes to power. He's threatening to introduce a number of new tariffs, which could fuel inflation and limit the Fed's ability to cut interest rates. In the days following the debate, US bond yields temporarily spiked and the greenback appreciated, especially against the Mexican peso and the Canadian dollar.
  • Meanwhile, the latest inflation figures for Canada weren't quite so encouraging. Inflation ticked back up, confounding analyst expectations of another decline. This weakened the case for the Bank of Canada to go ahead with a second consecutive rate cut in July. But economic activity is still slow in Canada, which should keep disinflationary pressures in place. Recent job market data showed that net job creation stayed flat, while unemployment continued to trend upward. The Canadian dollar is currently trading at around CAN$1.36/US$. Over the past few months, that average hovered closer to CAN$1.37/US$.
  • European currencies have been more volatile due to the elections in Europe. The gains made by far-right parties, which are often anti-euro, temporarily fuelled concerns. The snap election in France to counter the rise of the far right also triggered some volatility. The euro briefly traded below US$1.07 in June, while the Swiss franc enjoyed a short run as a safe haven currency. The Rassemblement National (National Rally) did rather well in the first round of the French election, but its advance was stopped short in the second round, reassuring the markets. However, no party achieved a majority, which means a coalition government must now be formed in France. As for the UK, Labour won a majority government by a landslide. Markets were more enthusiastic about this news, seeing it as the end of a long stretch of political instability in the United Kingdom. The pound surged back above US$1.28, the upper end of its range for the past few months.
  • Another currency that has performed well recently is the Australian dollar. We were already aware that the Reserve Bank of Australia had lingering fears over inflation. The central bank has refused to close the door to another rate hike. The most recent inflation numbers were higher than expected, which has increased speculation about a rate hike in Australia, and the AUD/USD pair has settled above US$0.67.

Main Factors to Watch

  • We still expect another rate cut from the Bank of Canada in late July. Since the markets haven't fully priced that in, the Canadian dollar could depreciate somewhat as a result. The value of the US dollar could also change depending on expectations for the September Fed meeting. We're keeping our forecast for the end of summer at CAN$1.38/US$. After that, the loonie could gradually regain some of the ground lost to the US dollar.
  • What happens with US monetary policy will continue to be a key factor for many exchange rates. We're still not convinced that the Fed would rush into a rate cut in September. We believe it would rather wait until November—after the election and once it sees more compelling signs that inflation is under control. As a result, the US dollar could rally somewhat in the coming weeks. 

Main Exchange Rates

Currency Market

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