After a data-driven slump on Monday, the US dollar has since been a little stronger against most major currencies and was holding in the positive territory at the time of writing in mid-morning European session on Wednesday. It will be a busier second half of the week for the greenback with lots of top-tier data releases to come. Currency pairs like the EUR/USD and USD/CAD will be quite volatile thanks to additional risk events concerning the Eurozone and Canada, where both central banks are expected to cut interest rates by 25 basis points each. This week’s macro events could set the trend for days if not weeks to come.

Canadian dollar hurt by oil’s slump despite US data weakness

The USD/CAD remained above the key 1.3600 handle even after the US dollar sold off against most major currencies on Monday following a poor ISM manufacturing PMI. What’s more, we saw construction spending fall unexpectedly by 0.1% m/m. Yet this was not enough to send the USD/CAD below the key 1.36 support level, even as the likes of the EUR/USD hit fresh multi-month highs.

Weighing heavily on the CAD was the drop in oil prices, which fell after weak US factory data intensified demand concerns, already underscored by the OPEC+ decision to extend its output cuts on Sunday. Today, oil prices have now bounced back a little, after dropping for 5 days in a row, and down for the third consecutive week.

So, the USD/CAD is one pair to watch ahead of this week’s key US data releases and Bank of Canada’s policy decision on Wednesday. 

BOC seen cutting rates by 25 basis points

The BOC last raised interest rates to the current 5% in July last year. But could it finally start cutting rates again? 

Last month, we have seen an overall mixed bag of Canadian macro data. The employment data was quite strong with a net 90K job creation reported for April, while retail sales were surprisingly weak with a month-over-month print of -0.6% compared to a 0.3%r rise expected. Meanwhile, all measures of CPI were below forecast, which is what matters the most.

The BOC is expected to loosen its policy to 4.75% at today’s meeting, according to three-quarters of economists in a Reuters poll. The same poll showed three further cuts this year, with the last one being a coin flip. 

Given that there is some uncertainty over a potential rate cut at this meeting, we could well see a sharp move in CAD on the back of the decision. Uncertainty arises from the fact that the BOC may not want to diverge from the Fed, with the US central bank expected to wait until at least September before potentially cutting. Equally, with Canada’s CPI running within the bank’s 1%-3% target for a few months, it probably cannot justify delaying the cut.

US dollar faces key test with top tier data releases 

Thanks to consistently weak manufacturing data from around the world, demand concerns are the forefront of investors’ minds and we have seen some sharp selling in crude oil, keeping the Canadian dollar undermined. Investors have also so far resisted the temptations of picking up silver’s dip back below the $30 handle, following the metal’s big breakout in the last couple of months.

The US dollar will remain in focus as this week is packed with significant data releases. Key US macroeconomic indicators to watch include the ISM Services PMI and ADP private payrolls today, followed by the May jobs report on Friday. 

This week’s other data highlight was JOLTS Job Openings, which pointed to a softening of the labour market as the number of job openings during April fell to 8.06 million from a downwardly revised 8.36 million the month before. 

Here’s the full list of key data releases to watch on the economic calendar this week:

The Fed has indicated it is willing to wait until the summer ends before potentially cutting interest rates. This jobs report and wages data should provide further clues on that front. In recent weeks, we have seen bond yields rise, with investors growing increasingly worried about the possibility of interest rates staying elevated for a longer period. If that sentiment changes, say because of a run of below-forecast US data, then the US dollar may finally break down more decisively and start a clean trend.  

USD/CAD technical analysis and trade ideas

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The USD/CAD tried to climb out of its bearish channel twice in as many weeks, but on both occasions failed to show any further upside follow through, with resistance coming in at 1.3735. This, therefore, means that the trend is somewhat directionless in the short term outlook, which is also indicated with price oscillating around a flattening 21-day exponential moving average. 

The key level to watch is at around 1.3600. This level was resistance on multiple occasions, starting in December, then throughout March and early April, before we saw an eventual breakout. The rounded retest of this level from above has held firm on a number of occasions in mid-May. But the lack of upside follow-through means that more price action is needed in order to have a strong directional bias.

A clean break below 1.3600 would be a bearish development, although, for confirmation, a move below 1.3547 would still be required in my view, given that the technically important 200 day moving average converges between these two levels. This is what the bears would like to see. For the bulls, a clean break above 1.3735 resistance is needed now to tip the balance in their favour.

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