The USD/CAD currency pair edged lower during the Asian session on Thursday, retreating from its highest levels since August 5, around the 1.3860-1.3865 zone reached the previous day. Currently, spot prices are trading around 1.3825, down nearly 0.10% for the day, amid a modest decline in the US Dollar (USD). However, a significant corrective decline appears unlikely at this stage.
The US Dollar Index (DXY), which measures the Greenback against a basket of currencies, has eased from a nearly three-month high as investors take profits following strong gains over the past month. Additionally, fresh buying interest in Crude Oil prices has supported the commodity-linked Canadian Dollar (CAD), exerting downward pressure on the USD/CAD pair.
Despite this, the prevailing sentiment that the Federal Reserve (Fed) will implement modest rate cuts over the next year keeps US Treasury bond yields elevated near a three-month peak. This backdrop, combined with political uncertainties and geopolitical risks associated with ongoing conflicts in the Middle East, is likely to provide support for the safe-haven USD and the USD/CAD pair.
The Bank of Canada’s (BoC) recent decision to cut its key interest rate by 50 basis points for the first time since the COVID-19 pandemic, along with expectations for further rate cuts, could limit any significant gains for the Canadian Dollar. Consequently, market participants may prefer to wait for substantial follow-through selling before confirming a potential peak for the USD/CAD pair and considering deeper losses.
Looking ahead, traders are keenly awaiting the release of the flash US PMI figures, which, along with US bond yields and overall risk sentiment, are expected to influence USD demand. Additionally, fluctuations in Oil prices are anticipated to create short-term trading opportunities. However, the overall fundamental landscape suggests that the path of least resistance for the USD/CAD pair remains upward.
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