USD/CAD holds steady above 1.3700 as trade tension eases amid holiday-thinned trading

• USD/CAD trades around 1.3720 ahead of the American session on Monday.
• US President Trump steps back from EU tariff threat, extends deadline to July 9.
• DXY index slips to four-week low before stabilizing on easing geopolitical risk.

The Canadian Dollar (CAD) gives back some of the initial gains against the US Dollar (USD) at the early American session on Monday, with the USD/CAD pair trading around 1.3720 at the time of writing after hiting a daily low of 1.3686 earlier in the day as follow-through selling faded on the signs of easing trade tensions between the United States (US) and the European Union (EU).

On Friday, US President Donald Trump reignited the trade tensions by threatening to impose a 50% tariff on EU goods starting June 1, citing stalled negotiations, adding to a risk-off mood. However, on Sunday, Trump backed away from this threat, agreeing to extend the deadline back to July 9. This U-turn comes on the back of a phone call between Trump and European Commission President Ursula von der Leyen.

The Loonie hit a seven-month high against the US Dollar on Friday after Canadian Retail Sales data was released. The data revealed a stronger-than-expected 0.8% rise in the Retail Sales in March, beating the market forecast of 0.7%. The data reinforces the resilience of Canadian consumer spending, despite broader economic concerns.

Recent Canadian data has painted a mixed but constructive macroeconomic picture. While headline inflation showed a notable cooling in April, underlying price pressures remained firm, with the Bank of Canada’s (BoC) preferred core measures rising at a faster pace.

Last week’s stronger-than-expected core inflation data, coupled with strong consumer demand, can lead the BoC to move cautiously in its rate-easing path at its next meeting in June. In the wake of these mixed signals, currency swap markets continue to price in a 32% probability of a 25 basis point rate cut by the BoC at its June meeting, according to Bloomberg. The combination of sticky core inflation and resilient consumer spending has left markets divided, with some economists now expecting the central bank to hold rates steady.

Meanwhile, the US Dollar remains under pressure with the Dollar Index (DXY) hitting a four-week low of 98.70 at the start of the week on Monday. At the time of writing, the Greenback stabilizes above the 99.00 level on the hopes of easing trade tensions between the US and EU. Still, it remains broadly weak amid mounting fiscal concerns and a cautious Federal Reserve (Fed) outlook.

Looking ahead, with both the US and UK markets closed on Monday for public holidays, trading volumes are expected to remain light, which may limit meaningful price action. Later in the week, market participants will closely monitor Fed meeting minutes on Wednesday and Canada's Gross Domestic Product (GDP) data for the first quarter and March, scheduled for release on Friday.