Canadian Dollar Forecast, July 2024

USD Outlook

Last month, despite some weakness, the greenback was expected to rise, which has now happened with the USD reaching a post-COVID high, especially against Asian currencies. The Federal Reserve is not yet positioned to cut interest rates aggressively, as the balance between deflation in goods and inflation in services remains uncertain. With the economy slowing and inflation keeping rates high, earnings growth may suffer in the latter half of the year. A rise in the VIX index could negatively affect global equity markets and further boost the dollar. Inflation shows signs of cooling, and a loosening labour market is helping to reduce it, though unemployment may need to rise further to lower employment costs.

In Q2, CAD was the second worst performer in G10, with Canadian 2Y yields experiencing one of the largest declines among its peers. Since the June BoC meeting, several data releases have occurred: May CPI, monthly GDP, and May and June employment. The CPI report surprised to the upside, while the April GDP was softer. Recent employment releases indicated a cooling labour market. A higher USD/CAD (weaker CAD) is anticipated in the medium term due to expected BoC rate cuts in July and September. USD/CAD is projected to rise above 1.40 in the second half of 2024, with potential appreciation in 2025 driven by fiscal stimulus.

USD/CAD Forecast - July 2024 
 

EUR Outlook

The European common currency fell by nearly 2 cents, reaching the lower end of its trading range for the year. This decline aligns with the European Central Bank's (ECB) first interest rate cut and signals of further easing. The announcement of the French parliamentary elections also added volatility. The macroeconomic outlook supports less restrictive policies for the second half of the year. At its June meeting, the ECB conducted its first policy rate cut in almost five years, lowering the deposit rate from 4.00% to 3.75%. The market reaction was orderly, as the rate cut had been anticipated. Despite progress on inflation, price pressures remain due to strong wages. Initial results from the French parliamentary elections suggest a loss for Macron, but fears of a far-right majority have eased. The gap between the ECB and Federal Reserve's monetary policies is widening, suggesting the euro could weaken further this year.

EUR/CAD Forecast - July 2024 
 

GBP Outlook

With Sunak and the Conservatives losing the elections, Labour won a large majority with 411 seats. The fiscal path of the new government is broadly known, with more details expected in the autumn. Assuming minimal deviation from the previous government's March 2024 Budget, this should be neutral for GBP as markets have already factored this in. Regarding monetary policy, the June CPI release will be closely watched ahead of the next Bank of England meeting. Economists expect the BoE to start cutting rates, following a dovish hold previously. If the new government opts for more fiscal austerity early in the term, it could lead to slower growth, more monetary easing, and increased downside risk for GBP in the short term.

GBP/CAD Forecast - July 2024