In the Asian session on Thursday, the USD/CAD pair extends its retreat for a second consecutive day, hovering around 1.3750, following a pullback from its recent five-month peak of 1.3846 observed on Tuesday.
Contributing to the decline, the US Dollar Index (DXY) weakens, largely influenced by subdued US Treasury yields. DXY approaches 105.90, with the 2-year and 10-year yields on US Treasury bonds at 4.92% and 4.57%, respectively, at the time of reporting. The downtrend in the US Dollar exerts downward pressure on the USD/CAD pair.
The US Dollar faces headwinds following neutral remarks from Federal Reserve officials. Fed Governor Michelle Bowman highlighted on Wednesday a deceleration in inflation progress, hinting at a potential slowdown. Bowman also acknowledged the current restrictive nature of monetary policy, with its effectiveness under ongoing evaluation.
Additionally, Federal Reserve Bank of Cleveland President Loretta Mester recognized that inflation has surpassed expectations, emphasizing the need for further confirmation of sustained 2% inflation before policy adjustments.
Conversely, the downward trajectory in crude oil prices may impede the Canadian Dollar‘s (CAD) upward momentum, given Canada’s prominent role as a major oil exporter to the United States. West Texas Intermediate (WTI) crude oil prices dip to approximately $82.30 per barrel, amid ongoing market apprehensions regarding demand for the year ahead, particularly amid indications suggesting a potential de-escalation of tensions in the Middle East.
While the Canadian Dollar’s advance may face constraints, the dovish sentiment surrounding the Bank of Canada (BoC) could offset losses in the USD/CAD pair. Expectations for a 25 basis points (bps) rate cut from the BoC in June are bolstered by mixed Canadian inflation data released earlier this week.
