The USD/CAD pair encounters difficulty in gaining significant traction and remains within a narrow trading range just below the mid-1.3200s during the Asian session on Friday.

While spot prices successfully defend the 23.6% Fibonacci retracement level of the recent decline from the May peak, they have momentarily halted the retracement slide from the nearly two-week high witnessed overnight.

Crude oil prices consolidate the gains made over the past two days, which continues to support the commodity-linked Canadian dollar (Loonie). Conversely, the US dollar (USD) retreats from its highest level since June 13, acting as an additional headwind for the USD/CAD pair.

However, concerns persist regarding a potential global economic downturn impacting fuel demand, thereby limiting significant upward movements for oil prices. Furthermore, the hawkish outlook of the Federal Reserve (Fed) provides some backing for the US dollar and the major currency.

It is worth noting that the Fed recently indicated that borrowing costs might need to increase by up to 50 basis points by the end of this year.

Additionally, positive macroeconomic data from the United States released on Thursday gives the Fed further justification to continue raising interest rates, reinforcing market expectations of a 25 basis point increase at the upcoming July Federal Open Market Committee (FOMC) meeting.

Moreover, Fed Chair Jerome Powell reiterated earlier this week that two rate hikes are likely to occur this year, and he does not foresee inflation reaching the Fed’s 2% target until 2025.

Therefore, the focus of the market will remain on the US Core Personal Consumption Expenditures (PCE) Price Index, which serves as the Fed’s preferred measure of inflation and is scheduled for release later in the early North American session. This crucial data will play a vital role in shaping expectations regarding the future trajectory of the US central bank’s interest rate hikes.

Consequently, it will influence the demand for the US dollar and determine the next phase of directional movement for the USD/CAD pair. It is prudent to wait for robust follow-through buying before positioning oneself for a potential extension of this week’s noteworthy rebound from the year-to-date (YTD) low.


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