During early European trading hours on Monday, the USD/CAD pair dipped to 1.3645, marking a nearly three-week low as the US Dollar (USD) experienced a decline, exerting downward pressure on the pair. With no significant economic data releases from Canada, the trajectory of the USD will continue to be a key determinant for the USD/CAD pair.
The upcoming Federal Open Market Committee (FOMC) interest rate decision on Wednesday is poised to be a pivotal event, preceding US employment data scheduled for Friday. Analysts anticipate no change in rates during the two-day FOMC monetary policy meeting, with expectations leaning towards a hawkish tone from Fed Chair Jerome Powell and other policymakers. Powell emphasized the need for increased confidence in inflation returning to the 2% target before considering rate cuts, leading investors to adjust their expectations accordingly. The probability of a rate cut in July has reduced to 25% from 50% last week, while markets have priced in a nearly 60% likelihood of a rate cut in September, according to the CME FedWatch tool.
Regarding recent data, US inflation, measured by the Personal Consumption Expenditures (PCE) Price Index, exceeded expectations, climbing to 2.7% year-over-year in March. The Core PCE, favored by the Fed, rose to 2.8% year-over-year in March, surpassing market consensus.
On the Canadian front, the Bank of Canada’s (BoC) governing council members displayed divergence in opinions regarding the timing of potential interest rate cuts during their recent meeting. Despite Canada’s inflation rate reaching 2.9% in March, within the BoC’s target range of 1-3%, core inflation has moderated in recent months. Market expectations point towards potential rate cuts by the BoC in June or July, which could limit downside pressure on the Canadian Dollar (CAD) and constrain the decline of USD/CAD.
Additionally, the depreciation of crude oil prices has contributed to selling pressure on the commodity-linked Loonie, given Canada’s status as a leading crude oil exporter to the United States.
