USD/CAD ticks lower amid rebounding Oil prices/softer USD, downside potential seems limited
|- USD/CAD pulls back from its highest level since early June touched this Thursday.
- Rebounding Oil prices underpins the Loonie and caps the upside amid a softer USD.
- The Fed’s hawkish outlook should help limit deeper losses for the USD and the pair.
The USD/CAD pair retreats a few pips from the vicinity of mid-1.3500s, or the highest level since June touched this Thursday and drops to a fresh daily low during the early part of the European session. Spot prices, however, manage to hold above the 1.3500 psychological mark and seem poised to prolong the recent strong upward trajectory witnessed since the beginning of this month.
Crude Oil prices stage a modest recovery from a two-week low and for now, seem to have snapped a three-day losing streak, which, in turn, is seen underpinning the commodity-linked Loonie. The US Dollar (USD), on the other hand, eases from over a two-month peak and turns out to be another factor acting as a headwind for the USD/CAD pair. the fundamental backdrop, however, seems tilted firmly in favour of bearish traders and warrants some caution before positioning for any meaningful corrective decline.
Investors remain concerned about the worsening economic conditions in China - the world's top Oil importer. This, along with worries that economic headwinds stemming from rapidly rising borrowing costs will dent demand, should keep a lid on any meaningful upside for the black liquid. Furthermore, firming expectations that the Federal Reserve (Fed) will keep interest rates higher for longer favour the USD bulls and further contribute to limiting the downside for the USD/CAD pair, at least for the time being.
It is worth recalling that the minutes of the July 25-26 FOMC policy meeting released on Wednesday revealed that policymakers continued to prioritize the battle against inflation, though were divided over the need for more rate hikes. Moreover, the incoming US macro data pointed to an extremely resilient economy and should allow the Fed to stick to its hawkish stance. This pushes the yield on the benchmark 10-year US government bond back closer to its highest level since 2008 touched in October 2022.
Apart from this, the prevalent risk-off environment – as depicted by a generally weaker tone around the equity markets – adds credence to the positive outlook for the safe-haven Greenback. This, in turn, suggests that the path of least resistance for the USD/CAD pair is to the upside. Traders now look to the US economic docket, featuring the release of the usual Weekly Initial Jobless Claims and the Philly Fed Manufacturing Index. The data might influence the USD price dynamics and provide some impetus to the major.
Technical levels to watch
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