USD/CAD trades with negative bias below mid-1.3700s, lacks bearish conviction

• USD/CAD attracts some sellers as Fed Governor Waller’s dovish remarks undermine the USD.

• Reduced Fed rate cut bets help limit the USD downside and lend support to the currency pair.

• Trade-related uncertainties offset an uptick in Oil prices and might keep a lid on the Loonie.

The USD/CAD pair drifts lower during the Asian session on Friday and moves away from a three-and-a-half-week high, around the 1.3775 region touched the previous day. Spot prices, however, lack bearish conviction and trade just below mid-1.3700s, down less than 0.10% for the day.

The US Dollar (USD) retreats slightly from its highest level since June 23 in reaction to dovish comments from Federal Reserve (Fed) Governor Christopher Waller, saying that the central bank should cut its interest rate target in July. Apart from this, the upbeat market mood turns out to be another factor acting as a headwind for the safe-haven buck and exerting some downward pressure on the USD/CAD pair.

Any meaningful USD depreciation, however, seems elusive amid bets that the Fed will keep interest rates higher for longer amid inflationary concerns. The Canadian Dollar (CAD), on the other hand, might struggle to attract strong follow-through buyers on the back of persistent trade-related uncertainties. In fact, Trump announced a 35% tariff on imports from Canada, which will go into effect on August 1.

Trump added that levies would increase further if Canada retaliated. Adding to this, a 50% tariff on US copper imports should keep a lid on the CAD and offer support to the USD/CAD pair. Meanwhile, Crude Oil prices edge higher and look to build on the overnight bounce, though the upside remains limited. This might further contribute to capping the commodity-linked Loonie and limiting losses for the USD/CAD pair.

Traders now look to the US economic docket – featuring the release of Preliminary Michigan US Consumer Sentiment and Inflation Expectations, along with housing market data. Moreover, the broader risk sentiment will drive the USD. Adding to this, Oil price dynamics should provide some impetus to the USD/CAD pair. Nevertheless, spot prices remain on track to register modest gains for the second straight week.