USD/CAD dips to test YTD lows at 1.3650 amid generalised Dollar weakness

• The US Dollar drops across the board as the specter of a US recession returns.
• Weak US data is feeding hopes of a Fed rate cut in September.
• A "hawkish hold" by the BoC provided fresh support for the CAD on Wednesday.

The US Dollar's recovery has been short-lived. A frail rebound witnessed on Wednesday's late US market session was capped below 1.3700, and the pair resumed its broader downtrend on Thursday to test year-to-date lows, at 1.3650.

A combination of downbeat US macroeconomic data, investors' frustration amid a lack of progress on US trade negotiations, the uncertain tariffs scenario, and rising concerns about US debt keeps feeding a "sell America" trade that has hammered the Dollar over the last two months.

Weak US data boosts hopes of Fed easing

US data released on Wednesday revealed an unexpected contraction of the services sector's activity, and ADP figures showed that private payrolls grew well below expectations in May. These releases challenge the optimistic forecasts for Friday's Nonfarm payrolls and have revived fears of an upcoming economic recession.

US President Trump urged Fed Chairman Powell to lower interest rates immediately following Wednesday's figures. This is the last in a series of attacks by the republican leader, which questions the Fed's independence and boosts speculation about a rate cut. In both cases, bad news for the USD.

The CME Fed Watch tool shows a 57% chance that the Federal Reserve will cut rates in September, up from 32% a month ago.

On Wednesday, the Bank of Canada kept interest rates on hold at 2.75%, as widely expected, and warned about tariff uncertainty. Governor Macklem, however,¡ highlighted the positive economic developments and curbed hopes of further rate cuts in the near-term. All in all, a "hawkish hold" that kept the Canadian Dollar's downside attempts limited.