Canadian Dollar Shows Short-Term Strength Amid USD Momentum Loss

The Canadian dollar is showing signs of short-term strength against the U.S. dollar, as the USD/CAD pair has dropped by roughly 0.2% over the last two sessions. This recovery follows weeks of declines, though the recent move is not yet strong enough to indicate a lasting shift in market direction. Instead, it appears driven by a temporary loss of momentum in the U.S. dollar, rather than a structural improvement in the Canadian dollar.

This shift in the U.S. dollar's momentum follows the release of the latest U.S. Non-Farm Payrolls (NFP) data, which suggested a slowdown in labor market conditions. This has reduced expectations for higher interest rates ahead of the Federal Reserve's October meeting, with markets now pricing in an over 80% probability that rates will remain unchanged at 4.00%. The moderation in rate hike expectations has led to a partial loss of momentum in the U.S. dollar, as reflected in the DXY index, which has pulled back from recent highs near 102 points.

Another factor influencing the Canadian dollar is the ongoing trade tensions between Canada and the United States. Significant tariffs remain in place, with the U.S. imposing up to 50% on certain Canadian goods and Canada applying retaliatory tariffs ranging from 15% to 50% on U.S. products. Recent G20 trade meetings indicated that key issues remain unresolved, suggesting that trade tensions could continue to weigh on Canada's economic outlook, which is heavily dependent on trade with the U.S.

Technically, USD/CAD has been in an aggressive uptrend, but recent bearish corrections are testing the bullish structure. Key levels to watch include 1.42355 as resistance and 1.40526 as critical support. If buying pressure fails to regain momentum above these levels, a broader phase of indecision could develop, potentially evolving into a trading range.