**USD/CAD Climbs Toward 1.4000 as Oil Prices Retreat and Fed Rate Cut Expectations Subside**
*Based on original reporting by FxStreet’s Eren Sengezer, expanded with data and analysis from additional market sources.*
The USD/CAD currency pair is regaining upward momentum, rising toward the key psychological level of 1.4000. This latest rally is being shaped by a mixture of macroeconomic forces, including declining oil prices and easing expectations surrounding an imminent rate cut by the U.S. Federal Reserve. Both factors are putting pressure on the Canadian dollar, which tends to move in tandem with global oil price trends due to Canada’s status as a major crude exporter.
Below, we break down the key market-moving elements contributing to USD/CAD’s recent strength:
## Crude Oil Prices Decline, Weighing on the Canadian Dollar
Oil prices have declined notably in recent days, undermining support for the Canadian dollar. Canada is one of the world’s largest crude oil exporters, and as such, the loonie often tracks global energy market sentiment. As oil prices dip, so too does demand for CAD.
– West Texas Intermediate (WTI), the U.S. oil benchmark, has fallen below $77 per barrel, as of market open on Tuesday.
– Brent crude has weakened toward the $81 mark, reflecting concerns over faltering global demand and growing stockpiles.
– The U.S. Energy Information Administration (EIA) reported last week that stockpiles rose to their highest level since August, a sign of weakening consumption.
– Oil traders are also concerned that China’s slowing economy could reduce energy demand in the coming quarters. Despite recent policy stimulus efforts by Beijing, economic growth remains under pressure.
– The prospect of prolonged higher interest rates in major economies is also dampening the outlook for oil, as it curtails industrial activity and transportation fuel demand.
Given oil’s substantial weight in Canada’s trade balance and gross domestic product, this downturn in prices has translated into weakness for the loonie.
## Fed Rate Cuts Becoming Less Likely in Early 2025
One of the major catalysts supporting the U.S. dollar this week is a change in sentiment toward the Federal Reserve’s monetary policy trajectory. Until recently, financial markets were pricing in one or two rate cuts in early 2025, citing signs of cooling inflation and slower economic momentum. However, those expectations have begun to shift.
– FOMC officials have recently pushed back against the notion of early or aggressive rate cuts, noting persistent inflation in non-housing services.
– In a recent interview with Bloomberg, Fed Governor Christopher Waller indicated that inflation numbers are “moving in the right direction” but not yet sufficient to warrant immediate easing.
– CME’s FedWatch Tool now shows only a 60% probability of a rate cut in March 2025, down from nearly 90% just two weeks ago.
– The U.S. consumer price index (CPI) report for October showed some moderation in headline inflation but core inflation remained elevated, particularly in shelter and services categories.
– Several banks, including Goldman Sachs and Citigroup, now expect the Fed to remain on hold until at least June 2025, unless there are significant shifts in labor market data.
This more hawkish stance improves the yield differential between the dollar and other currencies, including the loonie, giving USD/CAD additional upward traction.
## Diverging Central Bank Policies in the U.S. and Canada
The growing divergence in monetary policy between the Bank of Canada (BoC) and the Federal Reserve is also contributing to the USD/CAD pair’s rise.
– The BoC has signaled that its policy rate, currently at 5.0%, may have peaked, and hinted at easing in 2025 if inflation continues to retreat.
– Canada’s October inflation report showed a deceleration in both headline and core CPI. Headline inflation fell to 3.1% year-on-year,
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