The USD/CAD pair pulled back after reaching an eight-month high of 1.3865 on Monday, trading around 1.3850 during European hours on Tuesday. This decline is driven by the dovish outlook surrounding the US Federal Reserve’s (Fed) policy in 2024.
Federal Reserve Policy Expectations
The Federal Reserve is anticipated to maintain current interest rates at Wednesday’s meeting. However, traders foresee a rate cut in September, with the CME FedWatch Tool indicating a 100% probability of at least a quarter percentage point reduction. Additionally, cooling inflation and easing labor market conditions in the United States have heightened expectations for three rate cuts by the Fed this year.
USD/CAD Dynamics
While the USD/CAD pair’s downside might be limited by the US Dollar‘s gains amid risk aversion, falling US Treasury yields could exert pressure on the pair. Currently, yields on 2-year and 10-year US Treasury bonds stand at 4.39% and 4.18%, respectively.
Impact of Crude Oil Prices
Lower crude oil prices are also influencing the Canadian Dollar, a commodity-linked currency, thereby limiting the USD/CAD pair’s decline. As Canada is the largest crude exporter to the United States, fluctuations in oil prices significantly impact the Loonie. West Texas Intermediate (WTI) crude oil is trading around $75.40 per barrel, extending losses for a third session due to a sluggish economic outlook in China and reduced supply concerns following eased Middle East tensions.
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