USD/CAD drops to over one-month low, holds just above mid-1.3600s amid weaker USD

USD/CAD drifts lower for the second straight day amid the prevalent USD selling bias.
Dovish Fed expectations, along with a positive risk tone, continue to weigh on the buck.
A modest downtick in Oil prices could undermine the Loonie and help limit deeper losses.

The USD/CAD pair extends last week’s breakdown momentum through the 50-day Simple Moving Average (SMA) and remains under some selling pressure for the second straight day on Monday. The downward trajectory drags spot prices to over a one-month low, around the 1.3665-1.3660 area, during the Asian session and is sponsored by the bearish sentiment surrounding the US Dollar (USD).

The USD Index (DXY), which tracks the Greenback against a basket of currencies, drops back closer to its lowest level since January touched earlier this month amid bets that the Federal Reserve (Fed) will start its rate-cutting cycle in September. The expectations were reinforced by San Francisco Fed President Mary Daly’s remarks, saying that the US central bank needs to take a gradual approach to lowering borrowing costs. This overshadowed the fact that the University of Michigan’s preliminary US Consumer Sentiment Index improved for the first time after four months and rose to 67.8 in August.

Apart from this, a generally positive tone around the equity markets turns out to be another factor denting demand for the safe-haven buck, which, in turn, is seen exerting pressure on the USD/CAD pair. The ongoing decline could further be attributed to some technical selling following last week’s breakdown and the subsequent rejection near the 50-day SMA pivotal support-turned-resistance. That said, a softer tone around Crude Oil prices could undermine the commodity-linked Loonie and hold back traders from placing fresh bearish bets ahead of this week’s data/central bank event risk.

The latest Canadian consumer inflation figures are due for release on Tuesday, which will be followed by the FOMC meeting minutes on Wednesday. Apart from this, investors will closely scrutinize Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium for fresh cues about the central bank’s policy path. This, in turn, will play a key role in influencing the near-term USD price dynamics. Furthermore, geopolitical developments in the Middle East, which tend to drive Crude Oil prices, should provide some impetus to the USD/CAD pair and determine the next leg of a directional move.

Economic Indicator

Consumer Price Index (YoY)

The Consumer Price Index (CPI), released by Statistics Canada on a monthly basis, represents changes in prices for Canadian consumers by comparing the cost of a fixed basket of goods and services. The YoY reading compares prices in the reference month to the same month a year earlier. Generally, a high reading is seen as bullish for the Canadian Dollar (CAD), while a low reading is seen as bearish.