USD/CAD falls toward 1.3700 as US Dollar offers gains ahead of economic data

USD/CAD halts its four-day winning streak, trading around 1.3720 during the European session on Friday. However, the US Dollar (USD) advanced against the Canadian Dollar (CAD) during the earlier hours of the Asian market due to the emergence of the risk aversion sentiment. This could be attributed to the higher-than-expected Purchasing Managers Index (PMI) data released on Thursday from the United States (US). The data reinforced the hawkish sentiment surrounding the Federal Reserve (Fed) of maintaining higher policy rates for an extended period.

The S&P Global US Composite PMI rose to 54.4 in May from April's 51.3, marking the highest level since April 2022. The index exceeded market expectations of 51.1. The Service PMI surged to 54.8, indicating the biggest output growth in a year, while the Manufacturing PMI increased to 50.9.

Additionally, the latest Federal Open Market Committee (FOMC) Minutes suggested that Fed policymakers expressed concerns about the lack of progress on inflation, which was more persistent than expected at the start of 2024. Federal Reserve Bank of Atlanta President Raphael Bostic stated on Thursday that the inflation outlook might not improve as quickly as market participants are hoping for.

On the CAD front, declining crude Oil prices are exerting selling pressure on the commodity-linked Canadian Dollar (CAD), as Canada is the largest oil exporter to the United States. West Texas Intermediate (WTI) Oil prices have been falling for the fifth consecutive session, trading around $77.80 per barrel at the time of writing.

Higher-than-expected US PMI data and hawkish comments from Federal Reserve officials suggest a delay in the Fed’s rate cuts. Higher interest rates can negatively impact economic activities in the United States, the world's largest oil consumer, potentially reducing Oil demand.

Additionally, the expectation that the Bank of Canada (BoC) might cut interest rates before the US Federal Reserve could weigh on the Canadian Dollar, supporting the USD/CAD pair.

Investors expect Retail Sales data from Canada on Friday. On the US front, US Durable Goods Orders and the Michigan Consumer Sentiment Index will offer insight into economic conditions in the United States.