USD/CAD consolidates around mid-1.3200s, holds above multi-month low touched last week

• USD/CAD oscillates in a range and is influenced by a combination of diverging forces.
• Rising US bond yields act as a tailwind for the USD and lend some support to the pair.
• An uptick in Crude Oil prices is seen underpinning the Loonie and capping the upside.

The USD/CAD pair struggles to gain any meaningful traction on the first day of a new week and oscillates in a narrow trading band during the Asian session. Spot prices currently trade around mid-1.3200s, nearly unchanged for the day amid mixed cues and relatively thin liquidity conditions.

A further recovery in the US Treasury bond yields assists the US Dollar (USD) in attracting some buyers for the third straight day, which, in turn, is seen as a key factor lending some support to the USD/CAD pair. That said, an uptick in Crude Oil prices is seen underpinning the commodity-linked Loonie and acting as a headwind for spot prices. Furthermore, dovish Federal Reserve (Fed) expectations might hold back the USD bulls from placing aggressive bets and cap the major.

Investors seem convinced and are pricing in a greater chance that the US central bank will start cutting interest rates as early as March. The bets were reaffirmed by a higher-than-projected decline in the US Core Personal Consumption Expenditure (PCE) Price Index – the Fed’s preferred inflation gauge. This comes on top of a still resilient US economy and ensures a soft landing in 2024, which should allow the US central bank to start easing its policy sooner rather than later.

Meanwhile, the Bank of Canada (BoC) Governor Tiff Macklem recently said that the central bank could also start cutting rates sometime in 2024. This leaves the Canadian Dollar (CAD) at the mercy of Oil price dynamics and the sentiment surrounding the Greenback. Nevertheless, the mixed fundamental backdrop warrants some caution before positioning for an extension of the USD/CAD pair’s modest bounce from the 1.3175 area, or a five-month low touched last week.

Traders might also prefer to wait on the sidelines ahead of important US macro releases scheduled at the beginning of a new month. This week’s busy US economic docket features the ISM Manufacturing PMI and JOLTS Job Openings on Wednesday, followed by the ADP report on Thursday, and the closely-watched NFP on Friday. Investors will also confront the release of FOMC minutes on Wednesday, which might provide cues about the timing of the first rate cut.

Technical levels to watch