The USD/CAD pair edged lower to around 1.3740 during early European trading on Tuesday, though the US Dollar (USD) remains steady as market expectations for a significant interest rate cut by the US Federal Reserve (Fed) in September have diminished.
According to CME’s FedWatch Tool, the likelihood of a 50 basis point (bps) rate cut in September has fallen to 50%, down sharply from 85% just a week ago. Despite this shift, the markets continue to fully price in at least a 25 bps cut at the upcoming Fed meeting.
Attention now turns to key economic data from the United States, with the Producer Price Index (PPI) set to be released on Tuesday, followed by the Consumer Price Index (CPI) on Wednesday. Traders are eager for signs that inflation remains stable, which could influence the Fed’s next move.
The Canadian Dollar (CAD), linked closely to commodities, faces potential headwinds due to declining crude oil prices. As the largest crude exporter to the United States, Canada’s economy is sensitive to shifts in oil markets. West Texas Intermediate (WTI) crude oil prices have pulled back to around $78.00 per barrel, ending a four-day rally. This decline follows the Organization of the Petroleum Exporting Countries’ (OPEC) downward revision of its 2024 demand growth forecast, largely driven by weaker projections for China.
Furthermore, the Bank of Canada (BoC) is expected to cut interest rates by 25 basis points at both its September and October meetings, which could further pressure the Canadian Dollar.
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