**USD/CAD Slips Near 1.3750 as Investors Price in Potential Federal Reserve Rate Cuts**
*By Somnath Mukherjee, originally published on FXStreet*
The US Dollar (USD) experienced renewed pressure against the Canadian Dollar (CAD) as the USD/CAD currency pair weakened, dropping toward the 1.3750 level. This decline coincides with rising speculation that the Federal Reserve (Fed) may soon initiate interest rate cuts in response to softening inflation data and slower economic activity.
The shifting expectations surrounding Fed monetary policy have significantly impacted the forex market, prompting traders to recalibrate their positions. The Canadian Dollar, in turn, has received some support, trading stronger against a weakening greenback amid fluctuating oil prices and domestic economic indicators.
This article provides a detailed breakdown of the factors affecting the USD/CAD exchange rate, an outlook on Fed policy, and the broader implications for the North American currency markets.
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### Key Highlights
– USD/CAD weakens toward 1.3750 following renewed market expectations for Fed rate cuts
– Lower US Treasury yields exert downward pressure on the USD
– Oil prices remain volatile, providing mixed signals for the Canadian Dollar
– US inflation appears to be moderating, bolstering the case for monetary easing
– Financial markets increase bets on possible rate cut as soon as September
– Bank of Canada (BoC) adopts a cautious stance, awaiting further economic data before making policy shifts
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### Breakdown of USD/CAD Decline
The USD/CAD pair experienced continued selling pressure, retracing from recent highs reached earlier in August. The pair traded around 1.3750 on increased volume as traders grew convinced that the Federal Reserve may soon start cutting rates despite holding them steady during the last policy meeting. Analysts believe this decline is reflective of broader macroeconomic concerns influencing USD valuations across major currency pairs.
#### Factors Contributing to the USD Weakness:
– **Federal Reserve Monetary Outlook**
Recent commentary from Fed officials and the release of soft inflation figures have fueled growing sentiment that the US central bank may switch to an easing cycle sooner than previously thought.
– July’s CPI data came in slightly lower than analyst expectations.
– Annual consumer price inflation in the US grew at 3.2 percent, below the 3.3 percent estimate.
– Core inflation, which excludes food and energy, has also shown signs of stabilizing.
– **Decline in US Treasury Yields**
As rate cut bets accelerate, yields on US government bonds have declined. The 10-year yield fell below 4.20 percent, weakening the dollar since lower yields decrease the relative appeal of holding USD-denominated assets.
– **Dovish Comments by Fed Members**
Several Fed officials have recently acknowledged a shift in tone:
– Minneapolis Fed President Neel Kashkari noted the risk of over-tightening and expressed openness to a rate cut if inflation continues to trend lower.
– Chicago Fed President Austan Goolsbee mentioned that real interest rates are already restrictive.
– **Mixed US Economic Data**
The latest US labor market reports and retail sales numbers suggest that while the economy remains on solid ground, momentum is clearly slowing:
– The July jobs report revealed non-farm payrolls rising less than expected.
– Retail sales growth has softened as consumers pull back discretionary spending.
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### Canadian Dollar Performance and Domestic Factors
While the US Dollar has weakened, the Canadian Dollar has seen modest support, bolstered by improved investor sentiment and relative confidence in domestic economic performance. That said, the loonie’s trajectory remains intertwined with commodity price action, particularly crude oil, and the outlook for Bank of Canada policy.
#### Canadian Dollar Tailwinds:
– **Oil Market Volatility**
As Canada is a net oil exporter, the CAD typically reacts positively to rising crude prices. Brent and WTI crude futures have recently hovered in the $83 to $88 range, but
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