The USD/CAD pair is consolidating its recent gains and trading within a narrow range around 1.4070 during the Asian session on Wednesday. While the pair remains close to its weekly high, the mixed economic backdrop and geopolitical tensions are prompting caution, limiting the scope for fresh bullish moves.
Crude Oil Prices Support Canadian Dollar Amid Geopolitical Tensions
Crude oil prices are holding onto strong gains from the previous session, buoyed by expectations that OPEC+ will announce an extension of its supply cuts during Thursday’s meeting. Additionally, escalating geopolitical risks, particularly Israel’s warning to attack Lebanon if its truce with Hezbollah collapses, are providing further support for oil prices. Since Canada is a major oil exporter, these developments are likely benefiting the commodity-linked Canadian Dollar (CAD), acting as a headwind for the USD/CAD pair.
Furthermore, market expectations that the Bank of Canada (BoC) will refrain from implementing a larger interest rate cut in December have also reduced pressure on the Canadian Dollar. This, combined with rising oil prices, continues to limit the upside potential for USD/CAD.
US Dollar Faces Headwinds Ahead of Fed’s Jerome Powell Speech
On the other hand, the US Dollar (USD) has struggled to gain meaningful traction. Traders appear hesitant to make aggressive bets ahead of Federal Reserve (Fed) Chair Jerome Powell’s speech, which is likely to provide further insight into the central bank‘s future policy stance. While there are expectations that the Fed will adopt a cautious approach to rate cuts due to concerns that expansionary policies under US President-elect Donald Trump could spur inflation, this cautious outlook is helping to cap the USD’s gains.
In addition, market participants are looking ahead to the release of the US Nonfarm Payrolls (NFP) report on Friday, which is expected to provide more clarity on the state of the labor market and influence the Fed’s future rate decisions. The results could further shape USD price dynamics in the near term.
Technical Outlook: Limited Downside for USD/CAD
Given the mixed fundamental factors, the potential for a sharp move lower in USD/CAD seems limited at this stage. Any significant downside could present a buying opportunity for traders looking to capitalize on the pair’s longer-term upside potential. As the market awaits key economic data and further guidance from the Fed, the USD/CAD pair’s movement is likely to remain constrained within its current range in the short term.
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