USD/CAD extends upside as US Dollar recovers ahead of US Manufacturing PMI

USD/CAD rises further to 1.3700 as the US Dollar bounces back with US ISM Manufacturing PMI in focus.
An expected decline in the US core PCE inflation boosts Fed rate-cut hopes.
Higher-than-expected increase in Canadian inflation eases hopes of BoC’s back-to-back rate cuts.

The USD/CAD pair extends its upside to near the round-level resistance of 1.3700 in Monday’s New York session. The Loonie asset strengthens as the US Dollar (USD) recovers more than half of its intraday losses after posting a fresh three-day low near 105.40.

Market sentiment remains positive as investors expect that the Federal Reserve (Fed) will begin reducing interest rates from the September meeting. S&P 500 futures post significant gains in European trading hours. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, bounces back to near 105.75. 10-year US Treasury yields jump to near 4.45%.

The expectations for Fed rate cuts in September were boosted by soft United States (US) core Personal Consumption Expenditure Price Index (PCE) data for May. Annual core PCE data, which is Fed’s preferred inflation measure, grew at a slower pace of 2.6%, as expected, from the prior release of 2.8%.

On the economic front, investors await the US ISM Manufacturing PMI for June, which will be published at 14:00 GMT. The PMI report is expected to show that output in the manufacturing sector improved to 49.0 from the prior release of 48.7 but remained below the 50.0 threshold.

Meanwhile, the Canadian Dollar weakens despite hotter-than-expected inflation data for May eased expectations of subsequent rate cuts by the Bank of Canada (BoC). The BoC began its rate-cutting cycle from June.

Economic Indicator

ISM Manufacturing PMI

The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US manufacturing sector. The indicator is obtained from a survey of manufacturing supply executives based on information they have collected within their respective organizations. Survey responses reflect the change, if any, in the current month compared to the previous month. A reading above 50 indicates that the manufacturing economy is generally expanding, a bullish sign for the US Dollar (USD). A reading below 50 signals that factory activity is generally declining, which is seen as bearish for USD.

Why it matters to traders?

The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers Index (PMI) provides a reliable outlook on the state of the US manufacturing sector. A reading above 50 suggests that the business activity expanded during the survey period and vice versa. PMIs are considered to be leading indicators and could signal a shift in the economic cycle. Stronger-than-expected prints usually have a positive impact on the USD. In addition to the headline PMI, the Employment Index and the Prices Paid Index numbers are watched closely as they shine a light on the labour market and inflation.

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