**USD/CAD Holds Firm Around 1.3750 Amid Inflation Fears and Fed Policy Uncertainty**
*Based on original reporting by FXStreet, expanded with supplementary market analysis and data*
The USD/CAD currency pair is trading with resilient stability near the 1.3750 level, maintaining recent gains despite evolving economic conditions in both the United States and Canada. Investors continue to monitor developments in U.S. macroeconomic data releases, with heightened inflationary pressures and central bank policy on center stage. Rising concerns over stickier-than-expected inflation in the U.S. have complicated expectations around future moves by the Federal Reserve, contributing to the recent firmness in the U.S. dollar. This, in turn, has underpinned the USD/CAD pair.
Meanwhile, Canadian data and rising oil prices have provided a counterweight, helping the loonie avoid deeper losses. However, the looming uncertainty surrounding the Bank of Canada’s (BoC) monetary policy, paired with global oil market volatility, has kept the pair within a relatively narrow trading range.
### Key Factors Supporting USD/CAD Stability
Multiple interrelated factors are contributing to the current holding pattern seen in USD/CAD near the 1.3750 level:
#### 1. Sticky U.S. Inflation Pressures
U.S. inflation remains elevated, intensifying speculation that the Federal Reserve could keep interest rates higher for longer. While the central bank has refrained from delivering clear signals about upcoming rate decisions, data continues to show resilience in the American economy despite the existing restrictive monetary conditions.
– The U.S. Consumer Price Index (CPI) for August showed a 3.7% year-over-year increase, slightly above market expectations.
– Core inflation, which excludes volatile food and energy prices, remained sticky at 4.3%, underpinning concerns that inflation is not easing quickly enough.
These readings have led to market speculation that the Federal Reserve may delay cutting interest rates well into 2024, or potentially raise rates again if inflation does not subside. The policy stance has strengthened the U.S. dollar across the board.
#### 2. Federal Reserve Policy Outlook in Focus
Uncertainty over the Federal Reserve’s upcoming policy decisions has caused volatility in U.S. treasury yields, which are closely watched by currency traders. This is a key factor impacting the strength of the U.S. dollar against its G10 counterparts.
– The Fed’s dot plot released in September continued to show one more rate hike is possible before the end of 2023.
– Speeches from Federal Reserve officials, such as Chair Jerome Powell, have reiterated a “data-dependent” approach, offering little clarity on when rates might change.
If upcoming U.S. data, particularly on jobs and inflation, show further economic resilience, expectations for a longer period of higher interest rates may cause renewed USD strength, creating upward pressure on USD/CAD.
#### 3. Canadian Dollar’s Correlation with Oil
The Canadian dollar, known colloquially as the “loonie,” is heavily correlated with crude oil prices due to Canada being a major oil exporter. Recent increases in oil prices, stemming from OPEC+ supply cuts and geopolitical tensions, have provided some underlying support for the Canadian dollar.
– West Texas Intermediate (WTI) crude oil, a key North American benchmark, recently traded above $90 per barrel, the highest level since November 2022.
– Saudi Arabia and Russia continue to implement voluntary supply cuts, restricting supply through the end of the year. This has driven expectations that global supply dynamics will remain tight in the coming months.
Higher oil prices generally support the Canadian dollar. However, the loonie’s gains have been limited due to uncertainty about Canada’s economic outlook and domestic monetary policy direction.
### Canadian Economic Outlook and Bank of Canada Policy
While the BoC has already implemented an aggressive tightening cycle over the past year, it has paused rate hikes more recently to assess the economic fallout. Now, with early signs of slowing growth but persistent
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