USD/CAD sticks to modest intraday gains around mid-1.3600s, bullish potential intact

• USD/CAD regains positive traction on Thursday and is supported by a bullish USD.
• The prospects for more Fed rate hikes and a softer risk tone benefit the Greenback.
• Retreating Oil prices undermines the Loonie and supports prospects for further gains.

The USD/CAD pair attracts some dip-buying on Thursday and stalls the previous day's modest pullback from the 1.3675 region, or its highest level since March 28. Spot prices, however, struggle to capitalize on the modest intraday uptick and currently trade around mid-1.3600s during the early part of the European session, up less than 0.10% for the day.

The near-term bias, meanwhile, seems tilted firmly in favour of bullish traders and suggests that the path of least resistance for the USD/CAD pair is to the upside. The US Dollar (USD) stands tall near a six-month peak touched on Wednesday and remains well supported by the prospects for further policy tightening by the Federal Reserve (Fed). In fact, the markets are now pricing in a nearly 50% chance of another 25 bps Fed rate hike move in November and the bets were lifted by the upbeat US ISM Services PMI, which rose to 54.5 last month – the highest reading since February.

Additional details of showed a rise in new orders, pointing to a resilient US economy, while higher Prices Paid sub-component was seen as potential signs of still-elevated inflationary pressures, which should allow the Fed to stick to its hawkish stance. The outlook, meanwhile, allows the yield on the benchmark 10-year US government bond to hold steady just below its highest level since 2008 touched in August. Apart from this, a generally weaker tone around the equity markets, weighed down by China's economic woes, further benefits the Greenback's relative safe-haven status.

This, along with a modest pullback in Crude Oil prices, which tends to undermine the commodity-linked Loonie, validates the near-term positive outlook for the USD/CAD pair. Meanwhile, the Bank of Canada (BoC) signalled on Wednesday that it could raise borrowing costs again to combat inflation. Market participants, however, seem convinced that the BoC will be relatively quick to cut rates in the wake of signs that the Canadian economy is cooling rapidly. This could dent demand for the Canadian Dollar (CAD) and support prospects for a further appreciating move for the major.

Market participants now look to the release of the Weekly Initial Jobless Claims data from the US, which will be followed by the Canadian Ivey PMI later during the early North American session. Traders will further take cues from speeches by FOMC members, which, along with the US bond yields and the broader risk sentiment, will drive the USD demand. Apart from this, Oil price dynamics should contribute to producing short-term trading opportunities around the USD/CAD pair.

Technical levels to watch