USD/CAD Pulls Back as Dollar Rally Loses Steam

The US dollar's recent rally has taken a pause after three strong weeks, leading to a retreat in the USD/CAD pair from its cycle high. Softer US economic data, reduced expectations for Federal Reserve rate hikes, and easing Treasury yields have weakened the greenback. Meanwhile, a robust Canadian trade surplus and the potential for higher crude oil prices are supporting a near-term pullback in USD/CAD.

Weaker-than-expected US payrolls and a slightly softer ISM services index contributed to the dollar's decline, as Fed hike bets were scaled back. The bond-market selloff stabilized, pulling Treasury yields slightly lower, though they remain elevated. The US trade deficit widened to $105.6 billion due to a surge in imports, raising concerns about weaker economic growth.

A stronger euro also contributed to US dollar weakness, with rising bets for an ECB rate hike in December. The weaker dollar helped USD/CAD pull back from its highs, aided by an unexpectedly strong Canadian trade surplus. Commodity currencies generally rose, with NZD/USD leading the gains and AUD/USD rising for a third day.

Technical analysis suggests the US dollar index (DXY) is due for a pause or pullback after its strongest three-week rally since November. Resistance levels and overbought conditions strengthen the case for a near-term slowdown. Similarly, USD/CAD's rally has stalled near the June high, with technical indicators suggesting a potential pullback to the 10-day EMA.

A bounce in crude oil prices could deepen the USD/CAD pullback, as oil tends to correlate positively with the pair. The 4-hour chart shows support around the 50-bar EMA and weekly pivot point, with RSI (2) heavily oversold. Bears may seek to fade moves towards the June high, maintaining a near-term bearish bias.