The USD/CAD pair remains under pressure for the second consecutive day on Thursday, but continues to hold above the critical 1.4000 psychological level during the Asian session. This follows a pullback from the 1.4175-1.4180 region, the highest level since April 2020. However, the broader fundamental backdrop suggests caution before expecting an extension of this week’s retreat.
Earlier this week, US President-elect Donald Trump announced plans to impose significant tariffs on all products imported from Mexico and Canada, which would disrupt the regional free trade agreement and potentially escalate trade tensions. Adding to the pressure on the Canadian Dollar (CAD) is the ongoing slump in Crude Oil prices, which are hovering near weekly lows. This decline stems from concerns about slowing fuel demand growth in both the US and China, the world’s top oil consumers. As a result, the weakening of oil prices undermines the commodity-linked CAD, while boosting the US Dollar (USD).
US Economic Data and Geopolitical Risk Support USD
Wednesday’s US economic data reinforced the resilience of the US economy, coupled with signs that inflation progress may be stalling. These factors suggest that the Federal Reserve may take a cautious approach to further interest rate cuts, which in turn supports the USD. This has contributed to a rebound in US Treasury bond yields and a partial recovery in the US Dollar Index (DXY), which tracks the USD against a basket of major currencies.
Additionally, ongoing geopolitical risks, including the tariff threats and other global uncertainties, have led to increased demand for the USD as a safe-haven asset, further supporting the USD/CAD pair.
Thin Trading Volumes and Market Caution Ahead of OPEC+ Meeting
Despite these supportive factors for the USD, traders are hesitant to make aggressive moves due to thin trading volumes caused by the US Thanksgiving holiday and the anticipation of the OPEC+ meeting scheduled for Sunday. However, with the USD benefiting from both economic data and geopolitical risks, the path of least resistance for the USD/CAD pair remains upward.
In the short term, any additional decline in USD/CAD could be viewed as a buying opportunity, with further downside likely to be limited in light of the prevailing economic and geopolitical conditions.
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