On Friday, UBS expressed a conservative outlook on the potential for the U.S. dollar to strengthen against the Canadian dollar, despite recent gains. The financial services firm noted that the currency pair has approached the upper limit of its recent trading range and may not sustain levels beyond 1.40 for an extended period.

The USD/CAD pair has encountered resistance trading consistently within the 1.38–1.40 band since late 2022. UBS predicts this pattern will persist in the near term, even though the U.S. dollar might temporarily climb to 1.40. The firm anticipates that the Federal Reserve will cut interest rates later in the year, which could influence the currency pair’s trajectory.

UBS also indicated a cautious stance on the possibility of the Bank of Canada easing its monetary policy. This caution is due to the nature of Canadian inflation, which has recently declined, and the historical tendency for Canadian policymakers to align their decisions closely with those of the Federal Reserve.

The firm suggests selling the USD/CAD pair at levels starting from 1.39 over the next month, citing a slight increase in volatility for the pair as a supportive factor for this trade strategy. This perspective comes amidst a broader context of market movements and monetary policy expectations.

InvestingPro Insights

As market participants consider UBS’s cautious stance on the USD/CAD currency pair, it’s worth examining the performance of the U.S. dollar itself for a broader perspective. According to recent data from InvestingPro, the (DXY) has shown a varied performance over different time horizons, which could impact currency pair strategies.

InvestingPro data highlights a modest 1-week price total return of 0.08% for the DXY as of April 20, 2024, suggesting short-term stability in the dollar’s value. Over a 1-month period, the DXY has appreciated by 2.42%, indicating a more significant uptrend that traders might consider when evaluating the potential for the USD to strengthen against other currencies. However, a 6-month lookback shows a slight decline of 0.14%, reflecting some mid-term volatility in the dollar’s strength.

Year-to-date, the DXY has seen a price total return of 4.66%, aligning with UBS’s observation of recent gains in the U.S. dollar. The 1-year price total return of 4.05% also supports the notion that the dollar has been on an upward trajectory over a longer period. With the previous close at 106.15 USD, these metrics provide a quantitative backdrop to the currency pair’s movements.

InvestingPro Tips suggest that traders should keep an eye on central bank policies and macroeconomic indicators that could influence the DXY’s performance. For those looking to delve deeper into currency trading strategies, InvestingPro offers additional insights and tips. There are 15 more InvestingPro Tips available, which can be accessed with a subscription. To enhance your trading toolkit, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Investing.com – The U.S. dollar handed back early gains Wednesday in volatile action, as traders digested the reported Israeli strikes against Iranian sites and the impact on risk appetite.

At 05:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 105.870, having earlier climbed as high as 106.190, just marginally below the five-month peak of 106.51 seen earlier in the week. 

Dollar hands back gains after Israeli strikes

The safe-haven dollar jumped higher earlier Friday following reports that Israel attacked Iran in an escalation of conflict in the Middle East, just a few days after Iran launched a drone strike on Israel.

This move marks a potential escalation in the Iran-Israel conflict, and could herald worsening geopolitical conditions in the Middle East, especially after initial reports showed strikes near locations holding Iranian nuclear facilities.

However, these gains have since dissipated after Iranian news agencies said there was no damage to the facilities, and the strikes have been seen to be rather limited in size. 

That said, the dollar is still likely to post a positive week as strong U.S. economic data and persistent inflation have prompted investors to drastically rethink the chances of the Federal Reserve cutting rates any time soon. 

A slew of hawkish comments from Fed officials have also helped the greenback, as evidenced by Atlanta Federal Reserve Bank President on Thursday saying that if inflation does not continue to move toward the U.S. central bank’s 2% goal, central bankers would need to consider an interest-rate hike.     

Sterling edges higher despite weak UK retail sales

In Europe, rose 0.1% to 1.0648, after fell less than expected in March, decreasing by 2.9% on the year, compared with a forecast 3.2% decline.

Additionally, Reuters reported the German government will raise its growth forecast for the German economy this year to 0.3%, from a previous forecast of 0.2%.

However, any euro strength may well be temporary with the now expected to cut interest rates before the Federal Reserve in an attempt to give the region’s struggling economies a boost.

climbed 0.1% higher to 1.2445, trading just above five-month lows despite British stagnating in March.

Sales volumes showed no growth last month, below the expected 0.3% increase, representing the first time that they have not grown in monthly terms since December.

Weakness in retail spending makes it more likely the will start cutting interest rates in the summer, probably before the Federal Reserve.

Yen boosted by safe-haven status

In Asia, traded 0.1% lower at 154.47, with the safe-haven yen boosted by the elevated tensions in the Middle East. 

The Japanese currency remained near 34-year lows, prompting caution over possible government intervention.

edged 0.1% higher to 7.2417, with the yuan near five-month highs amid uncertainty over the Chinese economy.

UBS revised its outlook on the currency pair, citing increased downside risks that could push the euro below the 1.05 level against the US dollar. The change in perspective comes as the US economy shows greater resilience to high interest rates than previously anticipated, and geopolitical concerns intensify to levels that are impacting currency markets.

UBS had initially maintained that the EUR/USD would hold steady within a narrow range, with solid support around the 1.05 mark. Investors were expected to view the US dollar as less attractive below this threshold, especially with an anticipated Federal Reserve rate cut in the second quarter. However, UBS now believes that the rate cut may be postponed until the end of the third quarter or later, which could lead to the US dollar appreciating until economic data permits the Fed to lower rates.

The European Central Bank (ECB), in contrast, appears ready to begin its rate-cutting cycle as early as June. This divergence in central bank policies may result in a scenario of US exceptionalism, where the US dollar benefits from a more restrictive Federal Reserve and the ongoing search for safe-haven assets.

The shift in UBS’s stance also reflects recent movements in other currency pairs and commodities, such as the decline in and the rise in oil prices. The prolonged conflict in Ukraine, tensions in the Middle East, and the upcoming US presidential election are contributing to a heightened search for safety among investors.

Despite the near-term challenges, UBS maintains a long-term positive outlook for the EUR/USD pair, expecting it to recover as the Fed begins to cut rates. The firm anticipates that European economic growth will rebound next year, and as US growth eventually slows due to high yields, the two economies will converge, increasing demand for euros. Additionally, lower global yields should support risk-on currencies more broadly.

Investors should be prepared for the EUR/USD to test the lower end of the 1.05 to 1.10 range and potentially break below it. The weakened support around 1.05 is attributed to the delayed timing of the Fed’s first rate cut, now likely shifting to September.

InvestingPro Insights

As UBS revises its outlook on the EUR/USD currency pair, it’s crucial for investors to keep an eye on market dynamics and company financials that could influence investment decisions. Here are some insights from InvestingPro that could offer additional context in the current economic climate:

InvestingPro Tips highlight that Dixie Group Inc. (DXYN) is currently trading at a low Price / Book multiple of 0.26, suggesting that the company’s stock may be undervalued relative to its book value as of the last twelve months ending Q4 2023. Additionally, the valuation implies a strong free cash flow yield, indicating potential for investor returns despite the company not being profitable over the last twelve months. For investors looking to delve deeper into the financial health and stock performance of Dixie Group Inc., InvestingPro provides additional tips at https://www.investing.com/pro/DXYN. There are 9 InvestingPro Tips available that could further guide investment strategies.

InvestingPro Data reveals a market cap of 7.63 million USD for Dixie Group Inc., with a negative P/E Ratio of -2.74, adjusted to -1.43 for the last twelve months as of Q4 2023. This negative P/E ratio reflects the company’s lack of profitability during this period. Revenue for the same period stood at 276.34 million USD, experiencing a decline of 8.97% year-over-year. Despite these challenges, Dixie Group Inc. has maintained a gross profit margin of 26.73%, highlighting its ability to retain a significant portion of sales as gross profit.

For those interested in exploring the full range of InvestingPro insights and tips, remember to use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. This could be a valuable resource for investors navigating the complexities of currency markets and company-specific financials in these turbulent times.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.