The USD/CAD pair maintained a defensive stance for the third consecutive day on Monday, finding support above last week’s swing low near the 1.3415 region. Despite the persistent downward pressure, a lack of significant follow-through selling suggests a cautious market sentiment. The pair’s recent pullback from the monthly peak, tested last Thursday, faces diverse influences, prompting traders to exercise prudence before taking aggressive bearish positions.
Geopolitical tensions intensified as Houthi rebels increased attacks on vessels in the Red Sea, and a drone assault by Iran-backed militant groups targeted US forces, resulting in the loss of three soldiers. The heightened risk of escalating tensions in the Middle East raised concerns about supply disruptions, propelling Crude Oil prices to a nearly two-month high on Monday. However, profit-taking ahead of the upcoming OPEC+ meeting on February 1 limited the commodity’s gains, potentially undermining the Canadian Dollar (CAD) and supporting the USD/CAD pair.
The broader strength of the US Dollar (USD) further contributes to the pair’s resilience, as uncertainties over the timing of the Federal Reserve’s potential rate adjustments persist. Despite progress toward the Fed‘s 2% inflation target, the market remains uncertain about the timing of the first rate cut. Strong demand from US consumers, as indicated by the Personal Income and Spending data released on Friday, coupled with an upbeat US Q4 GDP print, suggests a robust economy, potentially enabling the Fed to maintain higher interest rates for an extended period.
With the highly-anticipated FOMC monetary policy meeting on Wednesday and crucial US macro data, including the Nonfarm Payrolls (NFP) report on Friday, traders are likely to adopt a cautious stance. The outcome of these events will shape USD demand and provide meaningful impetus to the USD/CAD pair. Short-term opportunities may arise based on Oil price dynamics on Monday, given the absence of significant economic releases from both the US and Canada.
