USD/CAD: Cautious Optimism vs. Monetary Policy Expectations

USD/CAD exhibits the usual pre-data stagnation around 1.3200 as the European session commences on Tuesday. In this context, the currency pair of the US Dollar and the Canadian Dollar hovers around the 38.2% and 50% Fibonacci retracement levels, traced from the previous swing high in July. The New York Federal Reserve Bank reported on Monday that the NY Empire State Manufacturing Index declined from -5.5 to 1.1, surpassing expectations of -3.5.

The US Dollar remains under pressure due to cautious optimism prevailing in the market, with expectations of the Federal Reserve (Fed) adopting a less hawkish approach to monetary policy tightening following an anticipated interest rate hike in the July 26 meeting. Consequently, US Treasury bond yields have experienced a recent decline, keeping USD bulls on the defensive.

On the other hand, crude oil prices have reversed their pullback on Monday, providing a boost to the commodity-linked Canadian Dollar (Loonie). Furthermore, broader market sentiment may influence the demand for the US Dollar and potentially offer some momentum to the USD/CAD pair in the coming sessions.

Looking ahead, market participants will closely monitor the release of the Canadian Consumer Price Index (CPI) MoM data and the US Retail Sales figures later in the day. As the Federal Reserve has entered its blackout period ahead of the July 25-26 meeting, investors will carefully analyze the data and seek a clear direction for the USD/CAD pair.