USD/CAD Consolidates Around Mid-1.3200

USD/CAD struggled to gain significant momentum in the first trading week of the new year, and the Asian market fluctuated within a narrow range. USD/CAD is currently trading around the 1.3200 mid-point, almost flat throughout the day, amid mixed market sentiment and relatively scarce liquidity.

A further recovery in U.S. Treasury yields helped the U.S. dollar (USD) attract some bulls for the third day in a row, and is therefore seen as a key factor in providing some support to the USD/CAD pair. Nonetheless, a rise in crude oil prices is seen as a boost for the commodity-linked ruble and bearish for USD/CAD. In addition, market expectations for dovish Fed policy may curb aggressive bets by U.S. dollar bulls and limit USD/CAD gains.

Investors appear convinced and see a greater chance that the U.S. central bank will begin cutting interest rates as early as March. The U.S. core personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, fell more than expected, reaffirming investors’ bets. This is because the U.S. economy remains resilient and ensures a soft landing for the U.S. economy in 2024, which will allow the Federal Reserve to begin easing policy as early as possible.

Meanwhile, Bank of Canada (BOC) Governor Tiff Macklem recently stated that the central bank may also start cutting interest rates sometime in 2024. This leaves the Canadian dollar (CAD) at the mercy of oil price dynamics and U.S. dollar sentiment. Still, amid mixed fundamentals, investors still need to be cautious before going long after USD/CAD rebounded slightly from the five-month lows in the 1.3175 area hit last week.

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