USD/CAD hovers around 50-day SMA, remains on the defensive below mid-1.3700s

• USD/CAD stalls this week’s recovery from the monthly low amid the emergence of some USD selling.
• Dovish Fed expectations, retreating US bond yields and a positive risk tone exert pressure on the USD. 
• Softer Crude Oil prices could undermine the Loonie and help limit any further losses for spot prices.

The USD/CAD pair struggles to capitalize on a two-day-old recovery from sub-1.3700 levels, or a nearly one-month low touched earlier this week and attracts fresh sellers during the Asian session on Friday. Spot prices currently hover near the 50-day Simple Moving Average (SMA), around the 1.3725-1.3720 region, and a combination of diverging forces warrants some caution for bearish traders. 

The initial market reaction to Thursday's upbeat US macro data turns out to be short-lived amid dovish Federal Reserve (Fed) expectations, which prompts fresh selling around the US Dollar (USD) and the USD/CAD pair. In fact, US Retail Sales rose more than expected in July, which, along with a still resilient labor market, eased concerns about a sharp slowdown in the world's biggest economy. This forced investors to scale back their bets for a more aggressive policy easing by the US central bank. 

The markets, however, have fully priced in the prospects for an imminent start of the Fed's rate-cutting cycle in September. This, in turn, triggers a fresh leg down in the US Treasury bond yields, which, along with a generally positive tone around the equity markets, is seen exerting some downward pressure on the safe-haven buck. That said, a modest downtick in Crude Oil prices might undermine demand for the commodity-linked Loonie and help limit any meaningful downfall for the USD/CAD pair. 

Hence, it will be prudent to wait for acceptance below the 1.3700 mark before traders start positioning for an extension of the pair's recent sharp pullback from the vicinity of mid-1.3900s, or the highest level since October 2022 touched earlier this month. Traders now look to the second-tier US macro data – Building Starts and Housing Permits, along with the Preliminary Michigan Consumer Sentiment Index – to grab short-term opportunities later during the early North American session.