USD/CAD advances to over one-week high on bullish USD, remains below 1.3500 mark

The USD/CAD pair gains positive traction for the second straight day on Monday – also marking the third day of a move-up in the previous four – and climbs to over a one-week high during the Asian session. Spot prices, however, struggle to build on the momentum beyond a technically significant 200-day Simple Moving Average (SMA) and remain below the 1.3500 psychological mark.

The US Dollar (USD) climbs to its highest level since December 11 as investors further scaled back their expectations for a more aggressive policy easing by the Federal Reserve (Fed) in reaction to Friday's stellar US NFP report. The current market pricing suggests around a 15% chance of a Fed rate cut in March and the probability of a 150-bps rate cut in 2024 has also declined to just 25%. This remains supportive of a further rise in the US Treasury bond yields, which acts as a tailwind for the buck and is seen lending some support to the USD/CAD pair.

A private survey showed this Monday that business activity in China's services sector remained in expansionary territory for 13 straight months, though grew less than expected in January and added to worries about a slowdown. This, along with the risk of a further escalation of geopolitical tensions in the Middle East, temper investors' appetite for riskier assets and turns out to be another factor benefitting the Greenback's relative safe-haven status. The USD bulls, however, take a brief pause and keep a lid on any further gains for the USD/CAD pair.

Meanwhile, US Central Command said forces conducted a strike in self-defence against a Houthi a land attack cruise missile and struck four anti-ship cruise missiles prepared to launch against ships in the Red Sea. Furthermore,  the US signalled further strikes on Iran-backed groups in response to a deadly attack on American troops in Jordan. This assists Crude Oil prices to stall last week's corrective decline from the YTD peak, which seems to underpin the commodity-linked Loonie and contributes to capping the upside for the USD/CAD pair.

Traders now look forward to the release of the US ISM Services PMI, due later during the early North American session. This, along with the US bond yields and the broader risk sentiment, will drive the USD demand. Apart from this, traders will take cues from Oil price dynamics to grab short-term opportunities around the USD/CAD pair. Nevertheless, the aforementioned mixed fundamental backdrop makes it prudent to wait for some follow-through buying before confirming that spot prices have bottomed out and positioning for a further appreciating move.

Technical levels to watch