USD/CAD looks to approach 1.3850 on downbeat Crude prices

• USD/CAD could revisit the yearly high on the back of weaker Crude oil prices.
• The decline in the Chinese PMI index could put pressure on the Oil-linked CAD.
• BoC Governor Macklem said that higher interest rates and subdued growth will have repercussions on the government's spending.
• The decline in US Treasury yields undermines the US Dollar.

USD/CAD retraces recent losses post retreating from a yearly high, trading higher near 1.3840 during the Asian session on Tuesday. The pair could receive upward support on the back of downbeat Crude oil prices. The weaker Chinese Purchasing Managers' Index (PMI) data could bring some pressure on the prices of Oil, which could reinforce the strength of the USD/CAD pair ahead of the policy decision from the US Federal Reserve (Fed) on Wednesday.

Bank of Canada (BoC) Governor Tiff Macklem conveyed to lawmakers in the House of Commons on Monday that the intersection of elevated interest rates and subdued growth will have repercussions on the government's spending. While acknowledging the country's sustainable fiscal position, Macklem emphasized the need to exercise restraint in expenditure to safeguard social programs in the face of these economic dynamics.

The anticipation that the US Federal Reserve will maintain its policy rate at 5.5% in the upcoming meeting is dampening the strength of the US Dollar (USD). Adding to this, the release of moderate economic data from the United States on Friday did little to bolster the Greenback.

Western Texas Intermediate (WTI) trades below $82.50 per barrel at the time of writing. Traders adopt a cautious approach before the upcoming US Fed policy meeting, overshadowing the support previously provided by tensions in the Middle East.

The twist in China's economic narrative came in September as the NBS Manufacturing Purchasing Managers' Index (PMI) unexpectedly contracted to 49.5, which was expected to remain consistent at the 50.2 expansion seen in July. The index slipping below the crucial 50 mark, signaling contraction, adds a layer of concern. Furthermore, the NBS Services PMI mirrored this trend, dropping to 50.6, compared to the expected 51.8 and the previous reading of 51.7. These shifts in both the manufacturing and services sectors raise concerns about the depressed economic conditions in China.

The US Dollar Index (DXY) retraces the recent losses ahead of the Fed decision, trading around 106.30 by the press time. The prevailing market expectation that the Fed will keep interest rates steady at 5.5% in the upcoming policy meeting is anticipated to provide support for US Treasury bonds. The increased demand for T-bills is pushing down US Treasury yields, exerting downward pressure on the Greenback.

Additionally, investors will also monitor key indicators such as the US ADP Employment Change and the ISM Manufacturing PMI for October for further cues on US economic situation.