USD/CAD extends upside above 1.3950 on firmer US dollar after US-China trade talks

• USD/CAD gains momentum to around 1.3975 in Tuesday's early Asian session. 
• Easing trade tensions between the US and China lifts the US Dollar. 
• Higher crude oil prices might boost the Loonie and cap the pair's upside. 

The USD/CAD pair extends the rally to around 1.3975 during the early Asian session on Tuesday, bolstered by a stronger US Dollar (USD). The Canadian Dollar (CAD) marked its weakest point since April 10 against the Greenback since April 10 after a US-China trade deal gave the American currency a boost.

The easing of trade tensions between the world's two largest economies gives investors their clearest indication yet that US President Donald Trump is taking a softer approach than expected. This raises hope that the US economy can avoid a recession, which, in turn, lifts the US dollar broadly. 

"Continued strength in the DXY (U.S. dollar index) is expected to keep the loonie under pressure in the next trading session," said Karim Francis, head of currency risk management, North America, at Convera Canada ULC.

Investors now expect the US Federal Reserve (Fed) to cut its interest rates just twice in 2025. Swaps tied to Fed meetings now favor a 25 basis points (bps) reduction in September. Last week, they indicated three cuts this year, with a change likely as soon as July.

Meanwhile, a rise in Crude Oil prices could underpin the commodity-linked Loonie and cap the upside for the pair. It's worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive impact on the CAD value.