USD/CAD holds above 1.3700 on stronger US Dollar, higher US Treasury yields

• USD/CAD edges higher to 1.3735 in Tuesday’s early Asian session. 
• The US ISM Manufacturing PMI dropped slightly in June, indicating an ongoing contraction.
• Higher crude oil prices might cap the downside for the commodity-linked Loonie. 

The USD/CAD pair gains ground near 1.3735 during the early Asian session on Tuesday. The rebound of the pair is bolstered by the stronger US Dollar (USD) and higher US Treasury bond yields. Nonetheless, the upside of the pair might be limited as supply fears of crude oil in the second half of the year might lift the commodity-linked Loonie. The speech by Federal Reserve (Fed) Chairman Jerome Powell will be in the spotlight on Tuesday. 

The cautious stance from Federal Reserve (Fed) officials is likely to underpin the Greenback in the near term. The Fed has kept its benchmark policy rate in the 5.25%-5.5% range since last July, and the policymakers stated that no rate cuts will be appropriate until they gain more confidence that inflation is on a sustainable path to the Fed 2% target. 

San Francisco Fed President Mary Daly said on Friday that inflation remains too high, and she expected year-over-year inflation to potentially remain above 2% through the end of 2025. Meanwhile, Fed Governor Lisa Cook noted that she expected inflation to go "sideways" this year, and fall more sharply next year.

About the data, the US Manufacturing Purchasing Managers Index (PMI) for June declined to 48.5 from 48.7 in May. This figure came in weaker than the estimation of 49.1, the Institute for Supply Management (ISM) reported Monday. 

On the Loonie front, the Canadian Dollar (CAD) edges lower despite the hotter-than-expected inflation data in May, raising doubts about rate cuts from the Bank of Canada's (BoC). The BoC governor Tiff Macklem warned that the pace of interest rate cuts will likely be “gradual” and each decision will depend on the economic data. 

The downside of the Loonie might be capped amid the rise of crude oil prices. The renewed fears of wider Middle East geopolitical tensions and expectations of rising summer fuel demand continue to boost crude oil prices, which might support the commodity-linked CAD as Canada is the major crude oil exporter to the United States.