The US dollar (USD/CAD) pair stabilized around 1.4110 during Tuesday's Asian session after rising in the previous trading day. However, with expectations of a Federal Reserve rate cut rapidly increasing, the dollar's upward momentum weakened significantly, putting downward pressure on the exchange rate in the short term.

According to the CME FedWatch tool, the market's probability of a 25-basis-point rate cut by the Federal Reserve in December has risen to 81%, up from 71% the previous day, reflecting growing investor concerns about an economic slowdown.

Federal Reserve Governor Christopher Waller stated that the current weakness in the labor market has outweighed inflationary pressures, and that the September non-farm payroll data may be revised downwards. He emphasized that "concentrated job growth is not a good sign" and leans towards supporting an interest rate cut in the near term.

New York Fed President John Williams had previously stated that interest rates "may be lowered in the near future," further reinforcing market bets on an easing policy path. These consecutive dovish statements triggered a decline in the dollar, thus suppressing the dollar's gains against the Canadian dollar at its high levels.

Meanwhile, the market is awaiting the release of US retail sales data and the Producer Price Index (PPI) this week, which will influence the Federal Reserve's future policy direction and may bring new volatility to USD/CAD.

Despite the weakening US dollar, the Canadian dollar did not fully benefit from the oil market decline, primarily due to the continued drop in oil prices. The decline in oil prices is related to geopolitical tensions: the US is pushing for a peace agreement between Ukraine and Russia, disrupting market expectations regarding energy demand and supply.

Meanwhile, the market will focus on the American Petroleum Institute (API) weekly inventory data to further assess the supply and demand trends in crude oil. Weak crude oil prices have limited the appreciation potential of the Canadian dollar, temporarily curbing the downside of the USD/CAD exchange rate.

From a daily chart perspective, USD/CAD remains in a high range overall, but short-term momentum shows signs of weakening. The exchange rate has repeatedly encountered resistance in the 1.4140-1.4160 area, indicating significant selling pressure above. The RSI indicator is between 55 and 60, in bullish territory, but momentum is flattening, suggesting the upward trend may slow.

Short-term moving averages continue to slope upwards, but the shortening of candlestick bodies indicates weakening buying momentum. If the US dollar remains under pressure, the exchange rate may test the initial support level of 1.4050; a further break below this level could trigger a pullback towards the 1.3980 area.

If oil prices continue to decline or US data is stronger than expected, the USD/CAD pair may retest the 1.4160 resistance level; a break above this level would open up further upside potential.


Editor's Note:

The USD/CAD pair is currently in a rebalancing phase between bullish and bearish forces. Despite weak fundamentals indicating a weak US dollar, the Canadian dollar has been unable to mount a strong rebound due to lower oil prices, causing USD/CAD to enter a typical "high-level consolidation" phase in the short term.

The real determining factor will be the data from the coming week: US retail sales, PPI, and revised employment figures. If the US economic signals continue to deteriorate, the exchange rate may resume its downward trend; conversely, with the combined effect of weak oil prices and a short-term rebound in the US dollar, the exchange rate may still have the potential to retest the 1.4160 level.