**USD/CAD Stays Elevated Above 1.3800 but Lacks Clear Bullish Momentum as US Dollar Softens**
*By Harshal Barot | Original article published on FXStreet*
The USD/CAD currency pair is maintaining its position above the key 1.3800 threshold following a mixed trading session, reflecting a broader loss of bullish conviction among US dollar investors. Despite brief bullish attempts, momentum remains subdued due to declining US Treasury yields and overarching caution among market participants ahead of crucial economic data from both the United States and Canada.
This new week began on a quieter note following last Friday’s disappointing US Non-Farm Payrolls (NFP) report, which signaled a potential slowdown in the US labor market. The labor data added to the recent downward pressure on the US dollar, curbing its ability to push the USD/CAD pair higher—despite signs of relative strength in the US economy compared to global counterparts.
## Mixed Fundamentals Keep USD/CAD Range-Bound
After hitting recent highs in April, the USD/CAD has struggled to extend its gains, with the 1.3800 psychological level acting as both support and a short-term ceiling. While the pair attempted to break higher at the start of the week, price action suggests a lack of conviction among traders.
Factors currently influencing the USD/CAD price dynamics include:
– Weakness in the US Dollar due to speculation that the Federal Reserve is likely nearing the end of its interest rate tightening cycle.
– A slight recovery in crude oil prices, which tends to support the Canadian dollar, due to Canada’s status as a major oil exporter.
– Market caution ahead of key economic data from both sides of the border, which could alter expectations for monetary policy from the Federal Reserve and the Bank of Canada (BoC).
### 1. US Dollar Softness Reflects Tapering Rate Hike Expectations
The most recent US labor market data points to moderating employment growth. On Friday, the US released its April Non-Farm Payrolls report, which showed:
– Job additions came in at 175,000 vs. expectations of 243,000.
– Wage growth slowed, with Average Hourly Earnings rising just 0.2% month-on-month, down from 0.3% in March.
– The unemployment rate ticked up slightly to 3.9%, a level not seen since early 2022.
This softer data led investors to pare back expectations for further tightening by the Federal Reserve. Futures markets, as tracked by the CME FedWatch Tool, now indicate:
– A majority probability that the Fed will hold rates steady through mid-2024.
– A growing segment of the market sees the possibility of one or two rate cuts before the end of 2024, depending on how inflation and growth evolve in the second half of the year.
Lower interest rate expectations tend to weaken the US dollar by reducing the yield differential vs. other currencies. Canadian rates holding relatively steady, while US yields fall, narrow the gap and reduce upward pressure on USD/CAD.
### 2. Canadian Dollar Gains Some Support from Oil Price Recovery
The Canadian dollar, often closely tied to crude oil due to Canada’s large energy exports, has been supported in recent sessions by a modest rebound in global oil prices. West Texas Intermediate (WTI) crude, a benchmark for North American oil, bounced back to above $78 per barrel after last week’s multi-week lows, providing support for the loonie.
Contributing to oil’s recovery:
– Reports that Middle Eastern geopolitical tensions could re-emerge, sparking supply disruption fears.
– Hopes that Chinese demand might stabilize as Beijing rolls out more aggressive fiscal support packages to stimulate consumption and manufacturing.
– Continuous drawdowns in US crude inventories highlight stronger than expected domestic demand.
Given oil’s outsized role in influencing the Canadian economy and the Canadian dollar, any sustained rise in oil prices could keep USD/CAD under pressure or limit its upside, even
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