• USD/CAD trades back around 1.3900 and moves closer to its monthly highs.
• Recent US data on producer inflation and consumer spending bolster the US Dollar.
• The Canadian Dollar remains under pressure as Oil prices retreat from recent highs.

USD/CAD trades around 1.3900 on Thursday at the time of writing, up 0.10% on the day. The move is mainly driven by renewed strength in the US Dollar (USD), supported by solid US macroeconomic indicators, while the Canadian Dollar (CAD) is weighed down by the pullback in Oil prices.

The US Dollar draws support from the latest labor data released in the United States (US). Initial Jobless Claims fell to 198,000 last week from 207,000 previously, well below expectations. Continuing Jobless Claims also declined to 1.884 million, reinforcing the narrative of a still-resilient US economy. These figures reinforce the view that the Federal Reserve (Fed) can maintain a cautious and patient stance on monetary policy, despite persistent market expectations for potential rate cuts later in the year.

In this environment, the US Dollar Index (DXY), which measures the Greenback’s performance against a basket of major currencies, holds at elevated levels, reflecting the relative strength of the US economy. Other data, including regional manufacturing surveys, also suggest only a limited slowdown, providing further support to the US currency against its peers.

On the Canadian side, the Canadian Dollar remains under pressure. The correction in Oil prices, a key export for Canada, weighs on the currency. The decline in Crude prices is driven by easing geopolitical tensions and expectations of a more abundant supply, reducing the appeal of commodity-linked currencies. This unfavorable Oil dynamic limits the Loonie’s ability to benefit from an otherwise relatively stable domestic macroeconomic backdrop.

At the same time, expectations surrounding Bank of Canada (BoC) monetary policy remain cautious. Investors believe the Canadian central bank could maintain a neutral tone in the coming months, amid moderate growth and contained inflation, offering little additional support to the currency.

Overall, the combination of a US Dollar strengthened by solid economic data and a Canadian Dollar weakened by falling Oil prices allows USD/CAD to remain around 1.3900, with a short-term bullish bias as long as these fundamental factors persist.