The USD/CAD currency pair edged higher during the Asian session on Tuesday, maintaining a foothold above the 1.3800 round figure, yet the upside remains limited amid a weaker US Dollar (USD) and mixed fundamental cues.
Despite modest gains, the pair appears to lack strong bullish conviction, reflecting ongoing uncertainty in the forex market. This article by Nabotex Group’s broker Richard Miller presents a complete and accessible breakdown of the topic.
BoC Rate Cut Bets Support USD/CAD
The Bank of Canada (BoC) remains in focus after the release of weak Canadian employment data on Friday, which fueled market speculation of a 25-basis-point (bps) rate cut at the September 17th policy meeting.
These dovish expectations have pressured the Canadian Dollar (CAD), thereby offering a tailwind for USD/CAD. Traders are closely monitoring the BoC’s monetary policy stance, as any further indications of easing could reinforce the pair’s upward bias.
While the CAD faces pressure from potential rate cuts, the commodity-linked currency is partly supported by a modest recovery in Crude Oil prices. Given that oil accounts for a significant portion of Canada’s export revenues, higher crude prices help mitigate CAD weakness and limit USD/CAD gains.
This dynamic highlights the inverse relationship between USD/CAD and oil market movements, which remains a key factor for technical traders.
USD Pressure Mounts Amid Dovish Fed Expectations
The US Dollar has retreated to fresh lows since July 28, driven by expectations of more aggressive policy easing by the Federal Reserve (Fed).
Following the disappointing US Nonfarm Payrolls (NFP) report, market participants have started pricing in the possibility of a jumbo rate cut at the upcoming FOMC meeting. This has exerted downward pressure on the USD, capping USD/CAD upside despite occasional dip-buying during the Asian session.
The Fed’s dovish tilt is compounded by broader market sentiment, which has turned risk-on, thereby reducing the Greenback’s appeal as a safe-haven currency. Investors appear cautious ahead of key US economic releases, including the Producer Price Index (PPI) on Wednesday and the Consumer Price Index (CPI) on Thursday.
These inflation indicators are likely to dictate the near-term direction of the USD and, by extension, the USD/CAD pair.
Technical Outlook: Holding Above 100-Day SMA
From a technical perspective, the USD/CAD pair remains comfortably above the 100-day Simple Moving Average (SMA), suggesting that medium-term support is intact. Despite the lack of follow-through buying, the pair’s ability to maintain levels above 1.3800 highlights a degree of underlying stability.
Traders are likely watching for confirmation of a breakout above recent highs to gauge the strength of bullish momentum, while support levels near 1.3770–1.3780 could provide short-term buying opportunities.
Mixed Fundamentals Keep Traders Cautious
The combination of BoC rate cut expectations, a weaker USD, and a resilient oil market has created a mixed fundamental backdrop for USD/CAD. While the CAD’s vulnerability due to potential monetary easing supports the pair, the USD’s relative weakness and the lack of strong risk-on drivers prevent a decisive move higher.
This has led to a consolidative price action, as traders appear hesitant to commit ahead of major economic releases.
Moreover, the upbeat market mood globally has further dented the Greenback’s safe-haven appeal, adding another layer of caution. Investors are carefully balancing short-term technical opportunities against macro-driven risks, waiting for inflation data and central bank commentary to provide clearer direction.
Oil Prices Provide Partial Cushion
As a commodity-linked currency, the Canadian Dollar is heavily influenced by energy prices. The recent uptick in Crude Oil prices offers some partial relief for the CAD, limiting the upside for USD/CAD.
For traders, this underscores the importance of monitoring WTI and Brent benchmarks, as any significant moves in oil prices could translate into short-term volatility for the pair.
Market Positioning Ahead of Key Data
With US economic indicators looming, traders remain cautious, opting to wait for PPI and CPI releases before initiating significant positions. The lack of follow-through buying during the Asian session reflects a wait-and-see approach, as market participants assess the direction of the USD and potential monetary policy shifts from both the Fed and the BoC.
Conclusion
In summary, USD/CAD is holding steady above 1.3800, supported by BoC rate cut expectations and tempered by dovish Fed outlook. The pair’s upside is limited, as mixed fundamentals, a weaker USD, and a modest oil recovery create a neutral-to-cautious technical environment.
Traders are likely to maintain a measured approach, keeping an eye on upcoming US inflation data and central bank communications before committing to any decisive trades. For now, USD/CAD remains in a consolidative phase, reflecting the ongoing tug-of-war between macro fundamentals and technical support levels.
