**USD/CAD Pulls Back From Four-Month Highs, Trades Below 1.3950 Amid Market Volatility**
*Adapted from an original report by Felipe Erazo, FXStreet*
The USD/CAD currency pair has pulled back from recent highs, trading below the 1.3950 mark in the latest session, despite its earlier push to levels not seen since March 2023. This recent movement reflects a complex interplay between U.S. economic strength, Bank of Canada (BoC) policy expectations, oil market dynamics, and broader investor sentiment. Market participants are closely watching key developments on both sides of the U.S.-Canadian border, as each could significantly influence the pair’s next direction.
In this detailed analysis, we examine the factors contributing to the recent weakening of USD/CAD from its four-month high and review what traders and investors should consider in the immediate short term.
## Recent Performance of USD/CAD
After touching a four-month high above 1.3970 on Thursday, the USD/CAD pair began to lose momentum and dipped below the 1.3950 level on Friday during the Asian and early European trading sessions. The setback is believed to have been triggered by a combination of profit-taking, a pullback in the U.S. dollar across the board, and stronger sentiment surrounding the Canadian dollar supported by rising crude oil prices.
Despite the setback, USD/CAD remains well supported on dips and is still considered to be in a broader uptrend. Traders continue to view any weakness as a possible buying opportunity, especially if economic data from the U.S. continues to outperform projections.
## Key Drivers Behind USD/CAD’s Recent Movements
Several important factors have contributed to this week’s price action in the USD/CAD currency pair:
### 1. Strength in the U.S. Dollar
– The U.S. Dollar Index (DXY) remains elevated near multi-month highs, trading around the 105.80 level at the time of writing. While the greenback has slipped from previous peaks, it maintains strong underlying support due to ongoing hawkish commentary from Federal Reserve officials and solid U.S. economic data.
– U.S. Treasury yields have surged in recent weeks, with the benchmark 10-year yield hovering near 4.6 percent. The spike in yields has been supportive of the U.S. dollar in general, applying upward pressure on currency pairs like USD/CAD.
– Investors continue to expect the Federal Reserve to hold interest rates higher for longer, a stance reinforced by recent data such as CPI and PPI prints that suggest inflation remains sticky.
### 2. Canadian Dollar Buoyed by Oil Prices
– One of the primary supports for the Canadian dollar is the price of crude oil, given Canada’s status as one of the world’s largest oil exporters.
– West Texas Intermediate (WTI) crude rebounded above $92 per barrel earlier this week before moderating slightly, helping bolster the Canadian dollar’s strength and contributing to pressure on USD/CAD.
– Higher oil revenue strengthens the Canadian economy, potentially reducing the urgency for near-term interest rate cuts by the Bank of Canada, which supports the CAD.
### 3. Divergent Central Bank Policy Outlooks
– The Federal Reserve and the Bank of Canada are expected to follow different policy paths in the coming months.
– The Fed has recently reinforced its higher-for-longer interest rate policy, while the BoC has signaled a willingness to hold or even hike rates again if inflation fails to drift back toward the target.
– Markets are currently pricing in at least one more rate hike from the Fed, while expectations for BoC rate hikes have diminished due to softening Canadian economic data.
### 4. Canadian and U.S. Economic Data
– Canadian GDP growth has slowed in recent months, leading some economists to downgrade growth forecasts for the remainder of 2023. This could limit the upside for the Canadian dollar moving forward.
– By contrast, job market resilience
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