Canada's services sector experienced a further contraction in January, as indicated by the S&P Global Canada Services PMI. The Business Activity Index fell to 45.8 from 46.5 in December, marking the third consecutive month below the 50-point threshold for contraction and signaling an accelerating decline in industry activity. The New Orders Index also dipped to 44.9 from 45.6, remaining in contraction territory for the fourteenth consecutive month. Surveyed firms widely cited weakening demand, attributed to tariff and trade policy uncertainties, alongside broader market volatility, as key contributing factors. Paul Smith, Economics Director at S&P Global Market Intelligence, noted that the pace of decline in both business activity and new orders accelerated in January compared to the close of last year, underscoring mounting pressures on the services industry. Against this backdrop, the Canadian government is intensifying efforts to diversify trade. Prime Minister Mark Carney emphasized that the risk of U.S. tariffs on key Canadian imports necessitates a reduction in the country's reliance on the American market. Currently, the U.S. accounts for approximately 70% of Canada's total exports, and with the United States-Mexico-Canada Agreement (USMCA) set for review on July 1st, the trade outlook remains subject to considerable uncertainty. On the inflation front, some easing was observed in the Canadian services sector. The Input Prices Index decreased to 58.0 in January from 60.0 in December, its lowest reading since September 2024, suggesting increased supplier competition is tempering pricing power. The Output Prices Index also declined in tandem. The overall S&P Global Canada Composite PMI Output Index edged down to 46.4 from 46.7. In contrast to the services sector, manufacturing saw a notable improvement in January, with the S&P Global Canada Manufacturing PMI rising to 50.4, crossing back into expansionary territory for the first time in over a year. In contrast, the U.S. services sector broadly maintained expansion in the first quarter, though employment growth and inflation signals showed divergence. Data from the Institute for Supply Management (ISM) revealed the non-manufacturing Purchasing Managers' Index (PMI) held steady at 53.8 in January, slightly exceeding market expectations and indicating stable service sector growth at the start of the quarter. However, business input costs notably increased, with the prices paid index rising from 65.1 to 66.6, suggesting that previously decelerating service sector inflation might re-emerge in the coming months. The supplier deliveries index climbed to 54.2, pointing to slower delivery times, partly attributed to severe weather disrupting supply chains. On the demand side, signs of cooling emerged. The new orders index decreased from 56.5 to 53.1, and the export orders index plunged to 45.0, a near two-year low, signaling a marked contraction in overseas demand. Some surveyed firms cited geopolitical tensions and trade friction as exacerbating anti-American sentiment in foreign markets. The services employment index also dipped from 51.7 to 50.3, indicating that employment expansion is nearly stagnant.

In the labor market, the ADP National Employment Report revealed a significant deceleration in U.S. private sector job growth in January, with only 22,000 new positions added, falling considerably short of market expectations. Job gains were primarily concentrated in education and healthcare services, as well as construction. Conversely, professional and business services saw a decline of 57,000 positions, and manufacturing jobs decreased by 8,000, acting as the main detractors from overall employment. Regarding wage growth, the year-over-year increase in salaries for job switchers experienced a slight moderation, while wage growth for job stayers remained largely stable. Federal Reserve Governor Lisa Cook indicated that she would not support another rate cut without clearer evidence of disinflation and emphasized her greater concern regarding inflation persistence rather than labor market weakness. Investors also considered the implications of Kevin Warsh's nomination for Federal Reserve Chair, noting his inclination towards shrinking the balance sheet and adopting a more gradual approach to interest rate reductions. Concurrently, U.S. President Donald Trump stated that he would not nominate Warsh if he supported raising interest rates. Trump further commented that a Federal Reserve rate cut was "almost a no-brainer" because "our interest rate levels are too high," but added, "we are a wealthy country again."

In the 4H timeframe, the Bollinger Bands are contracting, indicating a narrowing of volatility. The moving averages are trending upward, suggesting divergence in market sentiment. The EMA 12 and EMA 50 are on the verge of a golden cross, and the MACD's MACD line and signal line are forming a bullish crossover near the zero-axis, signaling a continuation of the upward trend. There is a high probability of a price increase towards the upper Bollinger Band and EMA 200, located around 1.372 and 1.375, respectively. The RSI reading of 60 suggests a predominantly buy-oriented market, with ascending lows. In the 1D timeframe, the Bollinger Bands are narrowing, and the moving averages are flattening, indicating a significant reduction in downside momentum. The price has broken through the EMA 12 without reversal signals, suggesting a likely upward movement towards the middle Bollinger Band, which is approximately at 1.375. The RSI reading of 46 indicates a shift from pessimistic to a wait-and-see market sentiment. Therefore, it is recommended to go long at the lows.

Trading Direction: Buy

Entry Price: 1.368

Target Price: 1.4

Stop Loss: 1.35

Support: 1.35, 1.325, 1.28

Resistance: 1.38, 1.4, 1.42