**USD/CAD Extends Losses Below 1.3800 as Fed Rate Cut Expectations Grow**
*Original source: Written by Alessandro Du Boff for FXStreet*
The USD/CAD currency pair is facing continued downward pressure, trading below the 1.3800 mark, as dovish sentiment surrounding the U.S. Federal Reserve’s monetary policy grows. Investors are adjusting their positions amid increasing hopes that the Federal Reserve may implement rate cuts sooner than previously expected. Weak U.S. economic data and a slower inflation trajectory have reinforced this outlook, exerting downward momentum on the greenback across multiple currency pairs, including the Canadian dollar.
Meanwhile, the Canadian dollar has found support from improving domestic economic data and resilient crude oil prices. Together, these factors are combining to weigh on the USD/CAD pair.
### Overview of Market Drivers
The current movement in the USD/CAD pair is the result of multiple macroeconomic dynamics, both from the United States and Canada. Below is an analysis of the contributing factors:
#### 1. Growing Expectations of Federal Reserve Rate Cuts
The central theme fueling USD weakness is the market’s growing anticipation that the Federal Reserve is nearing the end of its tightening cycle and may pivot toward easing by the end of this year or early next year.
– **U.S. Economic Data:** Recent reports have shown signs of economic deceleration, particularly in job growth and inflation, leading investors to bet that the Fed will have room to cut rates.
– **Inflation Trend:** The Consumer Price Index (CPI) has shown signs of trending downward. Although still above the Fed’s 2% target, the pace of deceleration is comforting to doves.
– **FOMC Statements:** Recent comments from Fed policymakers hint at a more cautious stance, acknowledging the risks of over-tightening monetary policy.
According to the CME FedWatch Tool, the probability of at least one rate cut by December has now surged above 60%, compared to under 50% just a month ago. Bond yields are also adjusting accordingly, with U.S. Treasury yields declining across the curve, making the dollar less attractive to yield-seeking investors.
#### 2. U.S. Dollar Weakness
The U.S. Dollar Index (DXY), which tracks the greenback against a basket of six major currencies, has dropped near 103.50 in recent sessions from highs near 105 in mid-August.
– **Yield Differential:** As U.S. yields soften and expectations shift, currencies with stronger domestic fundamentals or central banks seen as more hawkish see appreciation.
– **Risk Appetite:** Equities have remained supported, and the increased risk appetite encourages flows out of the USD into higher-yielding or commodity-linked currencies.
This broad-based softness in the USD is positively affecting pairs like USD/CAD, pushing them lower.
#### 3. Strength in the Canadian Dollar
On the other side of the equation, the Canadian dollar is showing resilience, benefiting from both domestic data and commodity support, specifically from oil.
– **Economic Performance:** Canadian GDP figures have so far remained robust relative to some peers. Consumer and business confidence indicators have not deteriorated significantly.
– **Bank of Canada (BoC) Policy:** While the BoC has paused its interest rate hikes, it remains vigilant and more hawkish in tone than the Fed, suggesting it may resume tightening if inflation surprises to the upside.
– **Crude Oil Prices:** WTI crude is hovering well above the $80/barrel mark. This is significant for the Canadian economy, as oil exports constitute a major share of the country’s revenue and support the loonie.
Higher oil prices typically result in capital inflows and increased demand for the Canadian dollar, further strengthening it against the U.S. dollar.
#### 4. Technical Outlook for USD/CAD
The technical picture also supports the bearish bias in USD/CAD.
– **Key Resistance and Support Levels:**
– Resistance: 1.3800, 1
Read more on USD/CAD trading.