**USD/CAD Extends Rally Toward 1.3850 as Market Bets on Interest Rate Cuts from Both the Fed and BoC**
*By FXStreet Authors | Additional Reporting by AI Writer*
The USD/CAD currency pair continues its upward rally, pushing closer to the 1.3850 level in early May. At the heart of this bullish momentum is growing speculation that both the Federal Reserve (Fed) and the Bank of Canada (BoC) are nearing the end of their monetary tightening cycles and could initiate rate cuts in the coming months.
This broad shift in expectations is reshaping investor sentiment, supporting the US dollar while dampening demand for the Canadian dollar. As economic indicators from both countries signal easing inflation and softening labor markets, financial markets are pricing in more dovish tones from North American central bankers, with the USD/CAD notably benefitting from a stronger greenback amid relative weakness in the loonie.
Here’s an in-depth breakdown of the factors driving the USD/CAD pair’s continued climb and what market participants are watching closely as interest rate expectations develop:
## USD/CAD Moves Closer to 1.3850: Key Takeaways
– The USD/CAD pair has extended its winning streak into early May, reaching near 1.3850, marking one of the highest levels since late 2023.
– Investor expectations have shifted decisively toward monetary easing from both the Fed and BoC, with rate cuts anticipated within 2024.
– The US dollar has found support in safe-haven demand and resilient economic performance, while lower oil prices and dovish signals from the BoC have weighed on the Canadian dollar.
– Macroeconomic data from both the US and Canada continues to influence the trajectory of the pair, with traders eyeing inflation, labor market, and GDP figures for further clues.
## Fed Rate Cut Bets Support USD Strength
Investor focus has turned sharply toward the trajectory of US interest rates, with market participants now factoring in the growing likelihood of a rate cut by September 2024.
According to CME FedWatch Tool:
– The probability of the first Fed rate cut occurring in September currently stands above 60 percent as of early May.
– Futures markets are pricing in at least two 25 basis point cuts by the end of 2024.
Recent comments from Federal Reserve Chair Jerome Powell and fellow policymakers have emphasized a data-dependent approach. While the Fed held interest rates steady at its May meeting, Powell noted:
> “We are prepared to maintain the target range for the federal funds rate for as long as appropriate, until we gain greater confidence that inflation is moving sustainably toward 2 percent.”
Despite signs of sticky inflation in some sectors, both headline and core inflation measures have generally shown a downward trend. The latest core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge, rose 2.8 percent annually in March, down from 2.9 percent in February.
At the same time, the US labor market is starting to show mild signs of cooling:
– The April nonfarm payrolls (NFP) report showed job creation slowing to 175,000, below the forecast of 238,000.
– The unemployment rate edged higher to 3.9 percent from 3.8 percent in March.
– Wage growth also decelerated, with average hourly earnings rising only 0.2 percent monthly in April versus a forecasted 0.3 percent.
These labor market developments support the Fed’s cautious stance and reinforce the view that interest rate reductions are on the horizon, which boosts investor confidence in USD as yields remain relatively favorable.
## Canadian Dollar Weighed by BoC Dovish Shift
On the Canadian side, the BoC is also showing signs of pivoting toward a more accommodative monetary policy as growth and inflation moderate. In the April policy meeting, the BoC retained its overnight lending rate at 5 percent but signaled a data-driven path
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