**USD/CAD Strengthens Above 1.3750 Ahead of Key US Economic Data Release**
*By Eren Sengezer | Adapted and Expanded from FXStreet*
The USD/CAD currency pair began the first week of 2024 on a strong trajectory, consolidating gains above the 1.3750 level during the European session on Friday, January 5. Market sentiment is being driven by anticipation around the release of the United States ISM Manufacturing Purchasing Managers’ Index (PMI) report, closely watched by traders for direction on the Federal Reserve’s future interest rate outlook and overall economic trajectory.
The pair has been trending higher over the past few sessions as higher Treasury yields in the US and renewed strength in the US Dollar continue to weigh down the Canadian Dollar. Meanwhile, oil prices, which often influence CAD due to Canada’s heavy oil export sector, have shown mixed early January performance, further weakening support for the Loonie.
This article aims to provide an in-depth analysis of the USD/CAD developments, key technical levels, upcoming economic data influences, and a broader look into the macroeconomic environment that may shape this pair’s behavior going into 2024.
## Key Drivers of USD/CAD Strength
### 1. Market Anticipation Ahead of ISM Manufacturing PMI
The US Institute for Supply Management (ISM) Manufacturing PMI is a critical gauge of economic health, especially as analysts attempt to determine whether the US economy is on a continued path of expansion or contraction.
– The December ISM Manufacturing PMI is projected to show an improvement from its prior reading of 46.7, with consensus estimates hoping for a figure closer to 47.1.
– A number over 50 would signify expansion in the manufacturing sector, whereas a value below that threshold indicates contraction.
– Since July 2022, the sector has repeatedly recorded contraction figures, reflecting ongoing challenges in the US industrial economy, despite strength in other areas like services and labor markets.
Should the upcoming report signal unexpected strength, it could lead to an upward revision of Federal Reserve expectations, especially if price pressures rise. Conversely, weaker-than-expected data may lend credence to the view that the Fed might need to pivot toward rate cuts sooner than initially expected.
### 2. US Dollar Performance
The US Dollar Index (DXY), which measures the greenback against a basket of six major currencies, has gained marginally since the beginning of the year. Amid uncertainty over the timing and magnitude of potential Fed interest rate cuts, investors have returned to the safe-haven currency, reversing some of the dollar weakness experienced in late December 2023.
– Ten-year US Treasury yields rebounded to around 4.0% after briefly dipping below that level in late December.
– Remarks from Fed officials, such as Richmond Fed President Thomas Barkin, have struck a balanced tone, emphasizing data dependency, which keeps markets cautious rather than overly aggressive in pricing in rate cuts.
This cautious optimism about the US economy and Fed policy has helped propel the USD higher, pushing USD/CAD comfortably above 1.3750.
### 3. Oil Prices and the Canadian Dollar
Canada’s economy is significantly correlated with crude oil exports. As such, fluctuations in oil prices often influence the Canadian Dollar’s value.
– West Texas Intermediate (WTI) crude oil prices wavered between $70 and $73 per barrel in early January trading.
– Concerns about slower global demand, particularly from China, have weighed on prices.
– Simultaneously, geopolitical tensions in the Red Sea and reduced output from OPEC nations offer some price support.
For the Loonie, the impact is twofold: weaker oil prices reduce export revenues, leading to reduced demand for CAD, while broader risk-off moods often shift trader focus toward the US Dollar as a more stable alternative.
## Technical Analysis: USD/CAD Eyes 1.3800 Resistance
From a technical standpoint, USD/CAD exhibits solid bullish momentum. The
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