Key Highlights:
- USD/CAD recovers from below 1.3600 after USD gains from global risk aversion.
- Soaring oil prices and less dovish BoC outlook support the Canadian dollar.
- Fed rate cut bets may limit further upside for the USD/CAD pair.
The USD/CAD pair witnessed a modest recovery on Friday, bouncing back from an intraday low below the 1.3600 mark—its weakest level since October 2024. In recent trading, the pair climbed toward the mid-1.3600s as investors sought refuge in the US Dollar (USD), driven by heightened geopolitical tensions and growing global uncertainty.
Safe-Haven Flows Support USD
The rebound in the greenback comes as geopolitical risks in the Middle East intensified, triggering a wave of safe-haven buying. The USD broke its two-day losing streak and gained ground after touching its lowest point since March 2022 on Thursday. This flight to safety has led to short-covering in USD/CAD, helping the pair regain lost territory.
Oil Rally and BoC Policy Outlook Underpin CAD
Despite the USD’s strength, the Canadian dollar (CAD) remains supported by a sharp rally in crude oil. Oil prices surged over 9%, reaching a five-month high due to fears of supply disruptions in the Middle East. This momentum in oil, a key Canadian export, strengthens the commodity-linked loonie.
Additionally, fading expectations for further interest rate cuts by the Bank of Canada (BoC) and optimism around a potential US-Canada trade agreement are providing tailwinds for the CAD, potentially capping any further upside in USD/CAD.
Fed Rate Cut Expectations May Limit USD Gains
Market participants continue to price in a possible rate cut from the Federal Reserve as early as September, fueled by signs of easing US inflation. These dovish expectations may limit aggressive bullish bets on the USD, suggesting caution before anticipating a full trend reversal in USD/CAD.
Technical Outlook: Watch for Follow-Through Momentum
While the pair has bounced off key support, traders should await confirmation through sustained buying before assuming a bottom is in place. A break above the 1.3680–1.3700 resistance zone could pave the way for a deeper recovery. On the downside, a retest of the 1.3550 level remains possible if bullish momentum fades.
Conclusion:
The USD/CAD pair is caught between safe-haven flows boosting the USD and strong crude oil prices lifting the CAD. With both central bank expectations and geopolitical developments in play, traders should brace for volatility and closely monitor key economic and technical signals.
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