USD/CAD holds steady above 1.3200/YTD low, upside potential seems limited

• USD/CAD is seen consolidating its recent losses to the lowest level since September 2022.
• A modest USD recovery from a multi-week low is seen acting as a tailwind for the major.
• The uncertain Fed policy outlook might cap any further upside for the buck and the pair.

The USD/CAD pair enters a bearish consolidation phase on Friday and oscillates in a narrow trading band near its lowest level since September 2022 touched the previous day. Spot prices, however, manage to hold steady above the 1.3200 mark through the early part of the European session, though any meaningful recovery still seems elusive.

A modest intraday pickup in the US Treasury bond yields assists the US Dollar (USD) to bounce off a one-month low, which, in turn, is seen lending some support to the USD/CAD pair. The Federal Reserve's (Fed) hawkish outlook, signalling that borrowing costs may still need to rise by as much as 50 bps by the end of this year, acts as a tailwind for the US bond yields and the USD. That said, Thursday's rather unimpressive US macro data raised questions over how much headroom the US central bank has to keep raising rates.

This, along with expectations that the Fed is getting closer to the peak of its policy tightening cycle might hold back the USD bulls from placing aggressive bets. The Canadian Dollar (CAD), on the other hand, might continue to draw support from the Bank of Canada's (BoC) surprise 25 bps lift-off last week. This, along with this week's goodish recovery in Crude Oil prices, from the lowest level since early May, could underpin the commodity-linked Loonie and further contribute to capping the upside for the USD/CAD pair, at least for now.

Nevertheless, spot prices remain on track to register heavy losses for the third successive week. Market participants now look to Fed Governor Christopher Waller's public appearance later during the early North American session. Traders will further take cues from the Preliminary release of the Michigan US Consumer Sentiment Index. This, along with the US bond yields, will drive the USD demand. Apart from this, Oil price dynamics might further contribute to producing short-term trading opportunities around the USD/CAD pair.

Technical levels to watch