USD/CAD holds onto recovery move near 1.4000 despite firm dovish Fed bets

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The USD/CAD pair clings to Monday’s recovery move to near 1.4010 during the Asian trading session on Tuesday.

USD/CAD grips Monday’s recovery move around 1.4000 following footprints of the US Dollar.
The US ISM Manufacturing PMI fell at a faster-than-expected pace to 48.2 in November.
Investors await US ADP Employment Change, and Canada’ employment data.

The USD/CAD pair clings to Monday’s recovery move to near 1.4010 during the Asian trading session on Tuesday. The Loonie pair bounced back on Monday as the US Dollar (USD) rebounded despite weak United States (US) ISM Manufacturing Purchasing Managers’ Index (PMI) data for November strengthened the case for another interest rate cut by the Federal Reserve (Fed) this year.

At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades calmly near 99.40. The USD Index recovered on Monday after revisiting the monthly low around 99.00.

The ISM showed that the Manufacturing PMI declined at a faster pace to 48.2. Economists expected the PMI to come in lower a 48.6 from 48.7 in October. This was the ninth straight month when the Manufacturing PMI was expected to come in below 50.0. A figure below 50.0 is considered a contraction in the economic activity.

According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points (bps) to 3.50%-3.75% in December is 86.5%.

Going forward, the major trigger for the US Dollar will be the ADP Employment Change and the ISM Services PMI data for November, which are scheduled for Wednesday.

Meanwhile, the Canadian Dollar (CAD) is expected to trade on the sidelines as investors await the employment data for November, which will be released on Friday. The labor market data is expected to influence market expectations for the Bank of Canada’s monetary policy outlook.

Economists expect the Canadian Unemployment Rate to have accelerated to 7% from 6.9% in October. The Canadian laborforce is expected to have remained steady.

Economic Indicator

ISM Manufacturing PMI

The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US manufacturing sector. The indicator is obtained from a survey of manufacturing supply executives based on information they have collected within their respective organizations. Survey responses reflect the change, if any, in the current month compared to the previous month. A reading above 50 indicates that the manufacturing economy is generally expanding, a bullish sign for the US Dollar (USD). A reading below 50 signals that factory activity is generally declining, which is seen as bearish for USD.

Why it matters to traders?

The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers Index (PMI) provides a reliable outlook on the state of the US manufacturing sector. A reading above 50 suggests that the business activity expanded during the survey period and vice versa. PMIs are considered to be leading indicators and could signal a shift in the economic cycle. Stronger-than-expected prints usually have a positive impact on the USD. In addition to the headline PMI, the Employment Index and the Prices Paid Index numbers are watched closely as they shine a light on the labour market and inflation.

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