FX Forecast August 2023 – US economy was downgraded

• For information purposes only

• USDCAD Q3 23
• Median 1.32
• Mean 1.32
• High 1.36
• Low 1.29
• Forward 1.35
Economic update and US dollar
The US Federal Reserve added another 0.25% to the policy interest rate in July to 5.5%, the highest level in 22 years. The officials implied that it would be the end of the rate hike cycle as long as inflation continues its downward trend. They did not rule out, though, the possibility of further action in their next meeting on September 19. The US inflation is now standing at 3%, slightly higher than the 2% long-term average target set by the central bank.
The Federal Reserve Chair, Jerome Powel, noted that the staff now predicts that there is no recession forecast for the US economy as the result of tightening policy. The expectations moved from heavy recession to soft landing of the economy and now the possibility of no recession at all. 
The resiliency of the economy provides room for the officials to keep the rates elevated for the foreseeable future to make sure inflation will not rise as the base effect fades away.
Following the Fed meeting the US dollar started to slightly depreciate, a move that was long awaited as the US dollar was exceptionally strong and the low risk of global recession encourages more investment in riskier assets and the capital to flow away from the US dollar.
The move was negated as the US credit rating was downgraded by Fitch, one of the top three global credit rating agencies. It sounds counterintuitive as the lower credit rating for the US economy helped the US dollar.
The reason is the for the currency to be a safe haven and the lower credit rating for the country means the fixed income debt by different US companies and agencies now have to offer higher premiums to make up for the lower credit rating, which in turn attracts more demand and capital to absorb the lucrative high rates.
On the Canadian side, the interest rates stand less than the US at 5% and the inflation moves to 2.8% which is within the acceptable range for the Bank of Canada. Looking at the two-year rates, Canada is around %25 higher than the US which shows the markets are expecting Canada to keep rates higher for longer.
On technical terms, the USDCAD broker the 150-day moving average and reached the highest level since June 1. The volatile commodity prices and uncertainty over the Chinese economy have not provided the best environment for the Canadian dollar. The forecast still shows the investor expects the US dollar to weaken and CAD to trade around 1.32 in Q3 against the US dollar. The US dollar could continue to remain strong against all the forecasts.