USD/CAD trades firmly near 1.3970 ahead of US ISM Services PMI data

USD/CAD exhibits strength near 1.3970 amid weakness in the Canadian Dollar.
The BoC is expected to cut interest rates again in the policy meeting later this month.
US government closure and slowing job demand have kept the US Dollar on the back foot.

Sagar Dua FXStreet

The USD/CAD pair demonstrates strength near a four-month high around 1.3970 during the European trading session on Friday. The Loonie pair appears poised to close the week on a positive note, despite the US Dollar (USD) remaining on the back foot, which suggests significant weakness in the Canadian Dollar (CAD).

The Canadian currency has remained under pressure as traders remain increasingly confident that the Bank of Canada (BoC) will cut interest rates again in the policy meeting later this month.

In September, the BoC resumed its monetary easing campaign and reduced its key borrowing rates by 25 basis points (bps) to 2.5% in the wake of significant weakness in the job market, with inflationary pressures remaining under control.

Meanwhile, the US Dollar (USD) has been under pressure due to the United States (US) government shutdown and worsening job market conditions. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades vulnerably near the weekly low around 97.50.

Cooling US labor demand has prompted bets supporting interest rate cuts by the Federal Reserve (Fed). According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 50 bps in the remainder of the year has increased to 87.5% from 65.4% seen a week ago.

In Friday’s session, investors will focus on the US ISM Services PMI data for September, which will be published at 14:00 GMT. The ISM Services PMI is expected to have grown at a moderate pace to 51.7%.

Economic Indicator

ISM Services PMI

The Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US services sector, which makes up most of the economy. The indicator is obtained from a survey of supply executives across the US 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 services economy is generally expanding, a bullish sign for the US Dollar (USD). A reading below 50 signals that services sector activity is generally declining, which is seen as bearish for USD.

Why it matters to traders?

The Institute for Supply Management’s (ISM) Services Purchasing Managers Index (PMI) reveals the current conditions in the US service sector, which has historically been a large GDP contributor. A print above 50 shows expansion in the service sector’s economic activity. Stronger-than-expected readings usually help the USD gather strength against its rivals. In addition to the headline PMI, the Employment Index and the Prices Paid Index numbers are also watched closely by investors as they provide useful insights regarding the state of the labour market and inflation.

Author

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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