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The USD/CAD pair retreated slightly after reaching its highest level since March 2020 during the Asian session on Monday, amid a modestly weaker US dollar.
However, this pullback is not accompanied by significant bearish sentiment or sustained downward momentum.
Key Factors:
- US Dollar Influence: Lower inflation in the US increases the likelihood of the Federal Reserve cutting interest rates twice this year, which has capped the dollar's ability to capitalize on Friday's positive movement. Additionally, the broader positive tone in equity markets is weighing on safe-haven assets, including the USD/CAD pair.
- US Policy Expectations: Investors are also factoring in the potential for incoming US President Donald Trump's protectionist policies to drive inflation higher, which could prompt a more hawkish stance from the Federal Reserve. This warrants caution for bearish traders targeting the US dollar.
- Oil Prices and CAD Impact: Easing tensions in the Middle East and expectations that Trump may relax sanctions on Russia in exchange for a deal to end the war in Ukraine are helping to mitigate concerns about supply disruptions, exerting downward pressure on crude oil prices. This could weaken the commodity-linked Canadian dollar and limit USD/CAD declines.
Trading Outlook:
To identify better trading opportunities, it would be prudent to wait for Trump's inaugural address and subsequent price action before making decisions regarding deeper losses.
Technical Analysis:
From a technical perspective, oscillators on the daily chart remain comfortably in positive territory, suggesting the path of least resistance for the pair is to the upside. Any declines are likely to be limited to the 1.4430 zone.
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