The USD/CAD pair reached its highest level since April 2020 during Tuesday’s Asian session, briefly nearing the 1.4200 mark. However, the pair struggled to maintain upward momentum, as subdued US Dollar (USD) buying activity tempered further gains. Despite this, the underlying fundamentals suggest a bullish outlook for the pair, with the path of least resistance tilting to the upside.
Canadian Dollar Pressured by Weak Economic Indicators
The Canadian Dollar (CAD) remains under pressure due to expectations of a larger interest rate cut by the Bank of Canada (BoC) at its upcoming meeting on Wednesday. These expectations have been fueled by a sharp rise in Canada’s unemployment rate for November, signaling economic softening.
Further weighing on the CAD is a modest decline in crude oil prices, which dampens the commodity-linked currency’s appeal. This combination of factors has bolstered the USD/CAD pair, although a lack of sustained USD demand has prevented a breakout beyond 1.4200.
Fed Policy Outlook Provides Mixed Signals for USD
The US Nonfarm Payrolls (NFP) report released on Friday reinforced expectations of a Federal Reserve rate cut in December, keeping US Treasury bond yields near their lowest levels since October. This has constrained the USD’s recovery from its recent one-month low.
However, market speculation about a less dovish Fed stance—given persistent inflationary concerns—provides a floor for the USD. As a result, the USD/CAD pair remains supported despite the muted buying interest.
Key Data and Central Bank Events Ahead
The market is in wait-and-see mode ahead of critical macroeconomic releases and central bank decisions, which could influence the USD/CAD pair’s trajectory. The US Consumer Price Index (CPI) data, due Wednesday, is expected to offer clarity on the Fed’s rate-cut trajectory and impact USD demand.
On the same day, the BoC will announce its policy decision, which is expected to clarify the extent of its dovish stance. The dual events will likely dictate the next significant directional move for the USD/CAD pair.
Outlook: USD/CAD Bias Remains Bullish
Given the contrasting monetary policy expectations between the Fed and the BoC, the USD/CAD pair is positioned for further gains. A decisive break above the psychological resistance at 1.4200 could pave the way for additional upside in the near term. Conversely, any meaningful pullback is expected to find strong support near the 1.4100 level, with broader sentiment favoring USD strength against the CAD.
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