Pullback in oil prices hampers USD/CAD movement

Key Movers

The DXY (Dollar Index) strengthened above 102.2, reaching nearly four-week highs. Although the US economy may accept higher interest rates, this did not outweigh concerns about the fiscal outlook caused by a US Credit rating downgrade. The financial markets experienced risk aversion following the rating downgrade, which further boosted demand for the dollar. A positive ADP report revealed that US private payrolls in July surpassed expectations. This indicates a robust labor market that supports the Federal Reserve's decision to maintain a restrictive monetary policy. On the other hand, Fitch Rating downgraded the US's long-term credit rating from AAA to AA+ on Tuesday, citing expected fiscal deterioration over the next three years and a high and growing general government debt burden. Additionally, Fitch predicted a mild recession in Q4 2023 and Q 2024.

EUR/USD remains close to the lower half of its daily range, trading below 1.0950. Despite the mixed macroeconomic data releases from the US, the US dollar stands firm due to risk aversion, preventing the pair from initiating a rebound.

The pound declined towards the 1.26 level, hitting a low not seen in over a month. This drop followed the Bank of England’s decision to raise its Bank rate by 25 basis points, this was largely anticipated by the financial market. The pound faced pressure as some market players still considered a more significant 50 basis points increase. This decision came amid data confirming that UK inflation remains higher compared to other major European economies. Policymakers are grappling with the challenge of balancing the need to bring inflation down while considering the significant impacts higher borrowing costs have already had on the British economy.