USD/CAD holds steady above 1.3500, upside potential seems limited amid bullish Oil prices

• USD/CAD attracts some buyers on the last day of the week, albeit lacks any follow-through.
• Bullish Oil prices underpin the Loonie and act as a headwind amid subdued USD price action.
• Bets for one more Fed rate hike in 2023 continue to lend support to the USD and favour bulls.

The USD/CAD pair edges higher during the Asian session on Friday and for now, seems to have snapped a five-day losing streak to a nearly two-week low – levels just below the 1.3500 psychological mark touched the previous day. Spot prices, however, lack any follow-through buying or bullish conviction and currently trade around the 1.3515 region, up less than 0.10% for the day.

Crude Oil prices hold steady near the highest level since November 2022, which, in turn, continues to underpin the commodity-linked Loonie and acts as a headwind for the USD/CAD pair. Against the backdrop of concerns about tighter global supplies, more stimulus measures from China – the world's top Oil importer – act as a tailwind for the black liquid. The People’s Bank of China (PBoC) lowered its Reserve Requirement Ratio for much of the banking system by 25 bps – its second such move this year, which is expected to release more liquidity and potentially shore up economic growth.

The announcement, meanwhile, boosts investors' confidence, which is evident from a generally positive tone around the equity markets. This, in turn, dents the US Dollar's (USD) relative safe-haven status and further contributes to capping gains for the USD/CAD pair. Any meaningful USD corrective slide from over a six-month high touched the previous day, however, seems limited in the wake of growing acceptance that the Federal Reserve (Fed) will stick to its hawkish stance. The bets were reaffirmed by the upbeat US macro data on Thursday, which once again pointed to a resilient economy.

The US monthly Retail Sales increased by 0.6% MoM in August, higher than the 0.2% anticipated and the downwardly revised 0.5% growth recorded in July, a sign that consumer spending remains ready. Adding to this, the US Initial Jobless Claims rose less than expected, to 220K during the second week of September from the 217K previous. Furthermore, the US Producer Price Index (PPI) accelerated to 0.7% in August from the previous month's upwardly revised reading of 0.4%. Moreover, the annual PPI rate accelerated to 1.6%, faster than projections of 1.2% and the prior month's 0.8%.

This comes on top of the US CPI report released on Wednesday and points to a still-sticky inflation, which should allow the Fed to keep interest rates higher for longer. The narrative remains supportive of elevated US Treasury bond yields, which favours the USD bulls. Traders now look to the US economic docket, featuring the release of the Empire State Manufacturing Index and Prelim Michigan Consumer Sentiment Index. Apart from this, the US bond yields and the broader risk sentiment will drive the USD demand, which, along with Oil price dynamics should provide some impetus to the USD/CAD pair. Nevertheless, spot prices remain on track to register losses and end in the red for the first time in nine weeks.

Technical levels to watch