The USD/CAD pair saw some dip-buying after slipping to sub-1.3800 levels, marking a one-week low, and climbed to a fresh daily high early in the European session on Tuesday. Currently, spot prices are trading around the 1.3835-1.3840 region, pausing a sharp retracement from the highest level since October 2022 reached on Monday.
Concerns over an economic downturn in China and softer US macroeconomic data suggesting a faster-than-expected slowdown in the world’s largest economy have dampened fuel demand, leading to a four-day decline in Crude Oil prices. This downturn in oil prices has weakened demand for the commodity-linked Canadian Dollar (Loonie). Additionally, a rebound in US Treasury bond yields has boosted demand for the US Dollar (USD), providing a tailwind for the USD/CAD pair.
However, a shift in global risk sentiment and dovish Federal Reserve (Fed) expectations might prevent USD bulls from making aggressive bets, capping gains for the currency pair. Markets are currently pricing in a nearly 100% chance that the Fed will cut interest rates by 50 basis points in September, which should limit any further upside for US bond yields and the Greenback. This scenario calls for caution among USD/CAD bulls, especially in the absence of significant economic releases from the US or Canada.
Moreover, the ongoing risk of a broader Middle East conflict raises concerns about potential supply disruptions from the key oil-producing region, which could help stabilize Crude Oil prices. Given these factors, it is prudent to wait for strong follow-through buying before positioning for the resumption of the USD/CAD pair’s recent upward trajectory observed over the past month.
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