**USD/CAD Holds Steady Near 1.3750 as Persistent U.S. Inflation Heightens Fed Policy Ambiguity**
*By FXStreet News, adapted and expanded by Assistant*
The USD/CAD currency pair continues to hover near the 1.3750 mark, as market participants weigh persistent U.S. inflation concerns against ever-evolving expectations for Federal Reserve monetary policy. Mounting uncertainty surrounding when the Fed might begin its long-anticipated interest rate cuts has kept traders cautious, bolstering the U.S. dollar’s position against the Canadian loonie. Despite occasional pullbacks, the pair maintains firm support near key levels, reflecting resilience amid mixed global economic signals.
This article expands upon the original analysis published by FXStreet.*[Original author credit: FXStreet News Team]*
## Overview of Recent USD/CAD Performance
In recent trading sessions, USD/CAD has found footing around the 1.3750 region, buoyed by renewed demand for the U.S. dollar and growing market sentiment that inflationary pressures might delay Fed rate cuts until later in the year. Investors are closely watching a range of economic data, central bank comments, and geopolitical developments, all of which are feeding into elevated volatility in the currency pair.
Key highlights of the current situation include:
– The pair remains supported near its multi-week highs.
– Recurring upward pressure on U.S. inflation continues to curb market hopes for an aggressive Fed rate-cutting cycle in 2024.
– The Canadian dollar lacks broader bullish catalysts, leaving it vulnerable to a stronger USD backdrop.
– Recent Canadian economic indicators, while mixed, have not provided enough momentum to pull USD/CAD meaningfully lower.
## U.S. Inflation and Federal Reserve Policy Outlook
The U.S. economy continues to show signs of resilience, with inflation proving stickier than many analysts had forecast. According to the latest data from the U.S. Bureau of Labor Statistics, the Consumer Price Index (CPI) remains above the Federal Reserve’s 2% target. The core CPI, excluding food and energy, is particularly concerning for the central bank, as it reflects more persistent price increases.
Relevant data impacting Fed expectations:
– April CPI data showed annual inflation holding firm at 3.4%.
– Core CPI cooled slightly but still printed at 3.6%, down from 3.8% in March.
– The Personal Consumption Expenditures (PCE) Index, the Fed’s preferred inflation gauge, also posted moderate readings above target.
– Labor market data showed continued strength, with unemployment remaining low and wage growth steady.
Amid these developments, market outlooks on the timing of the Fed’s rate cuts have shifted. Earlier in the year, markets expected as many as three cuts in 2024. However, with inflation plateauing and economic data remaining robust, those expectations have been dialed back.
Market-based expectations as of June 2024 (according to CME’s FedWatch Tool):
– First rate cut now likely delayed until September 2024 or later.
– Odds of an earlier rate cut in summer have sharply declined.
– Possibility of only one or two cuts by year-end now considered more realistic.
Federal Reserve officials have echoed cautious sentiment. Fed Governor Christopher Waller and Chair Jerome Powell have repeatedly emphasized that stronger or stickier inflation could warrant maintaining restrictive policy longer.
## Canadian Dollar Struggles to Gain Traction
The Canadian dollar (CAD) has weakened slightly in recent sessions, largely due to underwhelming domestic economic data and the Bank of Canada’s (BoC) dovish tilt. While the Canadian economy has avoided contraction, it has not exhibited notable growth either, leading to subdued sentiment for the loonie.
Factors suppressing CAD strength include:
– Canadian GDP growth slightly missed expectations in Q1 2024, expanding by just 0.4% annualized.
– Canadian inflation has eased back into the BoC’s target range, increasing likelihood of an earlier rate cut.
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