USD/CAD Bears Maintain Control Despite Cautious Start of Week

The USD/CAD is losing momentum, even as oil prices retreat from their five-week high. The pair is being influenced by contrasting factors such as US inflation expectations and job data, which differ from the upbeat employment figures in Canada.

The Bank of Canada (BoC) is expected to raise interest rates, and unless there is a further drop in oil prices, a softer US Consumer Price Index (CPI) will favor sellers of the USD/CAD pair.

While the release of second-tier data and risk catalysts can entertain intraday traders, the bears of USD/CAD maintain control around 1.3275, despite a cautious start to the week. Market participants are seeking fresh clues as Tuesday's Asian session begins. This price action aligns with the weakness in oil prices, Canada's main export commodity, and reflects the hawkish stance of the Bank of Canada.

WTI crude oil is trading with a slight bearish bias near $73.10, having reversed from its five-week high. The decline in oil prices can be attributed to the downbeat inflation figures from China, although supply cuts from Saudi Arabia and Russia, combined with hopes of increased oil demand from the US, are providing some support.

Meanwhile, the mostly positive Canadian employment figures reaffirmed expectations of a 25 basis point interest rate hike by the Bank of Canada at its upcoming meeting. Conversely, disappointing US jobs data and inflation expectations are weighing on the US dollar.

In June, Canada's Net Change in Employment significantly exceeded expectations, rising by 59.9K compared to the anticipated 20.0K, with a previous reading of -17.3K. However, Average Hourly Wages eased, and the Unemployment Rate increased during the same month. Additionally, the Ivey Purchasing Managers Index for June eased to 50.2 on a seasonally adjusted basis, falling short of the expected 51.5 and the previous 53.5.

On the other hand, the US Nonfarm Payrolls (NFP) report released on Friday fell below expectations for the first time in 15 months, with a figure of 209K compared to the market forecast of 225K and the revised previous reading of 309K. The Unemployment Rate, however, matched analysts' expectations at 3.6%, compared to the previous 3.7%.

Furthermore, the Federal Reserve Bank of New York's Survey of Consumer Expectations revealed that US consumers' one-year inflation expectation dropped to 3.8% in June, the lowest level since April 2021, down from 4.1% in May.

Despite these developments, Federal Reserve policymakers remain hawkish, which puts pressure on USD/CAD bears. San Francisco Fed President Mary Daly recently stated that a couple more rate hikes may be needed to bring inflation sustainably back to the Fed's 2% target. Cleveland Fed President Loretta Mester also emphasized the need for further monetary policy tightening to combat inflation. Moreover, Federal Reserve Vice Chair for Supervision Michael Barr emphasized their commitment to bringing inflation down to the target level.

In the midst of these factors, market sentiment has improved, limiting the recovery of USD/CAD amid expectations of a hawkish stance from the Bank of Canada and the overall weakness of the US dollar. This sentiment is reflected in the upbeat performance of S&P500 Futures, while US Treasury bond yields remain under pressure.

Looking ahead, the immediate movements of USD/CAD may be restricted due to a light economic calendar, with all eyes focused on the highly significant US inflation data and the Bank of Canada's interest rate decision, both scheduled for release on Wednesday.