Title: USD/CAD Holds Below 1.3750 as Fed Rate Cut Expectations Pressure the US Dollar
Author: Based on FXStreet article by Felipe Erazo, with added commentary and additional market context
The USD/CAD currency pair continued trading under the 1.3750 mark, weighed down by growing expectations that the US Federal Reserve may start cutting interest rates soon. Mounting evidence from recent economic data suggests a slowing US economy, prompting investors to dial back expectations for further tightening and begin preparing for a potential policy pivot. This changing outlook has placed downward pressure on the US Dollar (USD).
Meanwhile, the Canadian Dollar (CAD) has seen moderate support from robust domestic data and stability in oil prices, which remains a key driver for the CAD due to Canada’s significant energy exports.
This expanded analysis explores the fundamental and technical drivers of the USD/CAD exchange rate, examining recent economic developments, central bank commentary, oil market trends, and geopolitical considerations.
Fed Rate Cut Sentiment Grows
Investors continue to speculate about the future path of the Federal Reserve’s monetary policy. A mix of weaker US data and dovish messages from key Fed officials have triggered a serious reevaluation of rate hike probabilities:
– Recent US macroeconomic indicators, such as cooling consumer spending and slowing labor conditions, are prompting concerns about the sustainability of high interest rates.
– The US consumer price index (CPI) showed decelerating inflation in recent reports, supporting the Fed’s goal of bringing inflation toward its 2% target.
– Federal Reserve Chair Jerome Powell recently stated that policy decisions will remain data-dependent but hinted that rate hikes may have peaked, and further tightening is not guaranteed.
The futures market, as reflected in the CME FedWatch Tool, now shows increased odds of one or more rate cuts in the first half of 2025:
– As of early September 2025, markets are pricing in a 70% chance of a rate cut by the June 2025 meeting.
– This compares to previous expectations of a prolonged pause or another hike.
Weakening US data and growing global economic risks could solidify expectations for easing. As investors move money out of the US Dollar in anticipation of lower yields, the greenback has experienced broad softness across major currency pairs, including against the Canadian Dollar.
US Dollar Index Weakens
The US Dollar Index (DXY), which measures the performance of the USD against a basket of six major currencies, has pulled back from midyear highs as bond yields retreat. The two-year and 10-year US Treasury yields, which are sensitive to rate expectations, have declined as anticipated rate hikes have been priced out.
– The DXY remains below the 105 mark, off from highs above 106 earlier this quarter.
– Real rates (adjusted for inflation) have also moved lower, reducing the USD’s carry appeal.
Technical traders point to the 103.50 and 102.30 levels as the next potential downside targets if the bearish momentum continues. Any upside movement in the USD is likely to be challenged by a deeply entrenched dovish Fed narrative.
Canadian Dollar Steadies on Oil Prices and Domestic Data
The Canadian Dollar has gained ground against the USD as a combination of steady oil prices and resilient Canadian economic data has supported the loonie. Canada remains one of the world’s largest energy producers. Even amid global energy volatility, oil prices have shown relative stability.
– West Texas Intermediate (WTI) crude oil remains near the $85 per barrel mark, providing fundamental support for the Canadian Dollar.
– A favorable trade surplus and stronger-than-expected Q2 GDP growth in Canada suggest the economy is holding up despite global challenges.
Bank of Canada (BoC) Stance in Focus
The Bank of Canada has kept its benchmark interest rate steady at 5%, citing a cooling housing market and signs that previous rate hikes are having their intended effect. However, BoC policymakers have left open the possibility of further hikes if inflation pressures reignite.
– BoC
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