Ella 
USD/CAD fluctuated higher to around 1.3735 in early Asian trading on Tuesday. The USD/CAD rebounded as the dollar strengthened and U.S. Treasury yields rose. However, the upside of USD/CAD may be limited as market concerns about the outlook for crude oil supply in the second half of the year may boost the commodity-linked Canadian dollar. The speech of Federal Reserve Chairman Powell will be the focus on Tuesday.
The cautious stance of Federal Reserve officials may support the dollar in the short term. Since July last year, the Federal Reserve has maintained the benchmark policy rate in the range of 5.25%-5.5%, and Fed policymakers have said that it is not appropriate to cut interest rates until they are more confident that inflation is on a sustainable path to the Fed’s 2% target.
San Francisco Fed President Mary Daly said on Friday that inflation levels are still too high and it is expected that the annual inflation rate will likely remain above 2% by the end of 2025. At the same time, Federal Reserve Governor Lisa Cook noted that she expects inflation to fluctuate “smoothly” this year and fall more sharply next year.
On the data front, the U.S. manufacturing purchasing managers’ index (PMI) fell to 48.5 in June from 48.7 in May. The Institute for Supply Management (ISM) data released on Monday was weaker than expected at 49.1.
The Canadian dollar (CAD) fell despite higher-than-expected inflation data in May, which also raised doubts about the Bank of Canada’s interest rate cut. Bank of Canada Governor Tiff Macklem warned that the pace of rate cuts is likely to be “gradual” and each decision will depend on economic data.
Rising crude oil prices may limit the downside of the Canadian dollar. Market concerns about further geopolitical tensions in the Middle East and concerns about rising fuel demand in the summer continue to boost crude oil prices, which may support the commodity-linked Canadian dollar as Canada is a major crude oil exporter to the United States.
