- USD/CAD faces difficulty gaining traction due to widespread USD weakness.
- Expectations of a larger Fed rate cut, combined with a positive risk sentiment, put significant pressure on the USD.
- A strong recovery in oil prices this week supports the Canadian dollar (Loonie), creating additional headwinds for USD/CAD.
The USD/CAD pair has recovered from a minor dip during the Asian session and is now trading around the 1.3575 level, virtually unchanged for the day, though any significant upward momentum remains elusive.
The US Dollar (USD) has dropped to a more than one-week low amid rising expectations for a substantial interest rate cut by the Federal Reserve (Fed) next week, driven by signs of easing inflationary pressures in the US. On Thursday, data showed the annual headline Producer Price Index (PPI) slowed to 1.7%, down from the previous month’s revised figure of 2.1%. Additionally, core PPI, which excludes volatile food and energy prices, missed forecasts, posting a 2.4% YoY increase for the month.
The market quickly reacted, with over a 40% probability now priced in for a 50 basis point rate cut at the Fed’s September 17-18 policy meeting. This has kept US Treasury bond yields near their 2024 lows, and, combined with a positive risk sentiment, has exerted downward pressure on the USD, acting as a headwind for USD/CAD. Additionally, a solid recovery in crude oil prices this week, rebounding from their lowest levels since June 2023, has supported the oil-linked Canadian dollar (Loonie), further limiting USD/CAD gains.
Looking ahead, market participants are focused on Friday’s economic releases, including the Preliminary Michigan US Consumer Sentiment Index and some second-tier data from Canada. US bond yields and overall risk sentiment will also play a role in shaping USD demand, while oil price movements may provide short-term trading opportunities around USD/CAD. Spot prices appear set for modest weekly gains, but a sustained break above the 1.3600 level is likely required for fresh bullish momentum.
