The USD/CAD currency pair has been capturing the attention of investors as it continues to attract buyers for the fourth consecutive day. Market analysts observe that the pair has managed to reverse a significant portion of its weekly losses, driven by sustained buying of the US Dollar (USD). This renewed interest in the USD is largely due to the US Dollar Index (DXY) climbing back towards a two-year peak, buoyed by the Federal Reserve's (Fed) hawkish outlook. Geopolitical tensions, particularly the ongoing Russia-Ukraine war and unrest in the Middle East, alongside fears of an escalating trade war, further bolster the appeal of the safe-haven Greenback.
As investors closely monitor economic indicators, the US Nonfarm Payrolls (NFP) report is highly anticipated. It is expected to reveal that the US economy added 160,000 jobs in December, with the Unemployment Rate remaining steady at 4.2%. Meanwhile, insights from the Minutes of the December Federal Open Market Committee (FOMC) meeting showed that policymakers are observing a gradual easing in labor market conditions. They also expressed support for slowing the pace of rate cuts amid stagnant disinflation.
Despite these positive developments for the USD, the USD/CAD pair remains vulnerable due to persistent US Dollar strength and turmoil in the UK bond market. The upcoming expansionary policies of US President-elect Donald Trump are projected to boost inflation, keeping US Treasury bond yields elevated and providing a tailwind for the dollar.
The divergent monetary policy expectations between the Federal Reserve and the Bank of Canada (BoC) also play a role in this positive movement of the USD/CAD pair. While markets are pricing in a greater likelihood of a 25-basis-point rate cut by the BoC in January, expectations for US rate hikes continue to support the USD.
In Canada, employment figures are forecast to show an increase of 25,000 jobs in December. However, the Unemployment Rate is anticipated to rise slightly to 6.9% from 6.8% in November. Despite rising crude oil prices, which typically benefit the Canadian dollar (Loonie), they have not been sufficient to boost its momentum against the USD.
The USD/CAD pair has now reached the 1.4350-1.4345 region, which market analysts identify as a potential area for dip-buying. Nevertheless, the pair is likely to encounter resistance near the 1.4430-1.4435 supply zone. A breakthrough above this level could pave the way for the USD/CAD pair to retest its multi-year peak around the 1.4465 region touched in December.