- A combination of factors failed to assist USD/CAD to gain any meaningful traction.
- Hawkish BoC, bullish crude oil prices underpinned the loonie and capped the upside.
- Holiday-thinned liquidity held trades from placing fresh bets and helped limit losses.
The USD/CAD pair retreated over 20 pips from intraday highs and refreshed daily lows, around the 1.2065-60 region during the first half of the European session.
The pair continued with its struggle to register any meaningful recovery and remained well within the striking distance of multi-year lows touched earlier this May. The Canadian dollar was underpinned by a more hawkish Bank of Canada and bullish crude oil prices. It is worth recalling that the BoC brought forward the guidance for the first interest rate hike to the second half of 2022 at the April policy meeting.
Meanwhile, crude oil prices held steady near multi-month tops amid the bright outlook for fuel demand growth in the next quarter. This was seen as another factor that benefitted the commodity-linked loonie. On the other hand, expectations that the Fed will retain its ultra-lose monetary policy for a longer period kept the US dollar bulls on the defensive. This further acted as a headwind for the USD/CAD pair.
Various FOMC officials have downplayed worries about runaway inflation and reiterated that any spike in prices would prove to be temporary. This was evident from a muted reaction to Friday’s release of stronger than expected core PCE Price Index – the Fed’s preferred inflation measure. The gauge jumped to 3.1% YoY in April and validated the higher inflation narrative, though did little to provide any boost to the USD.
The fundamental backdrop remains tilted in favour of bearish traders and supports prospects for an extension of the recent well-established downward trajectory. That said, holiday-thinned liquidity conditions held traders from placing any aggressive bets and helped limit any meaningful slide for the USD/CAD pair, at least for the time being.
Technical levels to watch
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