USD/CAD Sees Volatility as Traders Anticipate FOMC & NFP Report

The USD/CAD pair started the new week positively after experiencing notable price swings on Friday. It maintains a bullish tone, hovering around the mid-1.3200s level during the Asian session.

The US Dollar (USD) is benefiting from increasing expectations that the Federal Reserve (Fed) will continue its monetary policy tightening. This sentiment is attracting buyers for the USD on Monday and is considered a key factor supporting the USD/CAD pair. Fed Chair Jerome Powell reiterated last week that borrowing costs might need to rise by as much as 50 basis points by the end of the year. Additionally, the current market pricing indicates an almost 85% chance of a 25 basis point rate hike at the next FOMC policy meeting in July, which is further reinforced by the fact that the US Personal Consumption Expenditure (PCE) Price Index remains well above the 2% inflation target.

In terms of recent data, the US Bureau of Economic Analysis reported on Friday that the annual PCE Price Index decelerated to 3.8% in May from 4.3% the previous month. The core index, which excludes food and energy components, also slightly declined to 4.6% from 4.7% in April. However, the report also revealed a significant slowdown in US consumer spending for May, which is dampening the bullish sentiment for the USD and capping any meaningful upside for the USD/CAD pair. Meanwhile, crude oil prices are consolidating recent gains and are not exerting much influence on the commodity-linked Canadian Dollar (CAD).

On the other hand, the softer domestic consumer inflation in Canada for May, which recorded its slowest increase since June 2021, may continue to weaken the Canadian Dollar and provide support for the USD/CAD pair. The monthly Canadian GDP data released on Friday, however, leaves room for the Bank of Canada to potentially raise interest rates in July. As a result, it would be prudent for traders to wait for strong confirmation of buying momentum before positioning for a continuation of the pair's recent bounce from the 1.3115 region, which marked its lowest level since September 2022.

Looking ahead, market participants are eagerly anticipating important US macroeconomic data at the beginning of the new month. The focus will be on the release of the ISM Manufacturing Purchasing Managers' Index (PMI) during the early North American session on Monday. Furthermore, the market will closely watch the release of the FOMC meeting minutes on Wednesday and the highly anticipated US non-farm payrolls (NFP) report on Friday. These events, along with Canadian jobs data and oil price dynamics, will drive demand for the Canadian Dollar and make it a eventful week for the USD/CAD pair.