USD/CAD holds above the 1.3200 mark with limited upside potential

During Tuesday’s Asian session, the USD/CAD pair exhibited a modest rebound, managing to recover most of the losses experienced in the previous trading session. Presently, the pair is hovering around the 1.3220 mark, reflecting a modest 0.25% increase for the day. This recent price action places the spot prices in proximity to the three-week high recorded on Monday, generating interest among traders and investors.

The principal driving force behind the recent strength of the US Dollar (USD) can be attributed to the growing likelihood of the Federal Reserve (Fed) implementing further policy tightening measures. Fed Chair Jerome Powell’s statements from the previous week, emphasizing the necessity of an economic slowdown and labor market weakness to achieve a credible 2% inflation target, have significantly contributed to the USD’s surge. Additionally, a positive US GDP report has bolstered market expectations regarding a potential 25 basis points rate hike by the Fed, possibly taking place in either September or November. As a result of these developments, US Treasury bond yields have experienced an upward trajectory, thereby increasing the allure of the Greenback as a safe-haven asset, especially amid lingering concerns surrounding China’s post-COVID recovery slowdown.

However, the ongoing indication of decreasing underlying price pressures in the US has raised the possibility of the Fed adopting a more dovish stance, which could result in the conclusion of its rapid rate-hiking cycle. Furthermore, the market’s optimism regarding potential stimulus measures from China has contributed to heightened investor confidence and fostered a positive sentiment across global equity markets, thereby tempering substantial gains for the USD. Moreover, the recent surge in Crude Oil prices, reaching their highest level since April 17, has provided additional support to the commodity-linked Canadian Dollar (CAD), potentially restricting significant upside potential for the USD/CAD pair in the near term. Consequently, market participants exercise caution and choose to await sustained follow-through buying before considering new bullish positions on the pair or contemplating further intraday appreciation.

Looking forward, the market’s focus remains firmly fixed on the US economic calendar, with particular attention directed towards the ISM Manufacturing PMI and JOLTS Job Openings data. These economic indicators are anticipated to significantly influence USD demand and could potentially impart additional momentum to the USD/CAD pair. Additionally, traders are closely monitoring the dynamics of Crude Oil prices as they seek short-term opportunities amid the prevailing market conditions. Nevertheless, the primary emphasis among market participants centers on the upcoming monthly employment reports from both the US and Canada, commonly known as the Non-Farm Payrolls (NFP) report, which is scheduled for release on Friday. The results of these reports will carry substantial weight and are expected to play a pivotal role in shaping the pair’s next directional movement.