The USD/CAD currency pair has rebounded from a five-month low of 1.3498 recorded on Monday, now trading around 1.3510 during the early European session. This recovery can be attributed to a stronger US Dollar (USD) driven by heightened risk aversion. However, the Greenback faces potential downward pressure from expectations of a Federal Reserve (Fed) rate cut in September.
Market sentiment suggests a high probability of the Fed implementing at least a 25-basis point rate cut this month. According to the CME FedWatch Tool, there is broad anticipation for a quarter-basis point reduction by the Fed at its upcoming meeting.
At the Jackson Hole Symposium on Friday, Fed Chairman Jerome Powell indicated a need for policy adjustments, stating, “The time has come for policy to adjust.” While Powell did not specify the timing or magnitude of potential rate cuts, he noted increased risks in the job market and reduced inflation concerns.
The Canadian Dollar (CAD), which is sensitive to commodity prices, has received support from rising crude oil prices. West Texas Intermediate (WTI) crude oil has extended its gains for a third consecutive day, trading around $75.20 per barrel. The rise in oil prices is linked to supply concerns driven by geopolitical tensions in the Middle East.
On Sunday, Hezbollah launched numerous rockets and drones into Israel, prompting a substantial Israeli military response involving around 100 jets targeting Lebanon. This escalation raises fears that the ongoing Gaza conflict could broaden into a regional confrontation, potentially involving Iran and the United States, according to Reuters.
Despite the CAD’s support from higher oil prices, the dovish stance of the Bank of Canada (BoC) could cap its gains. The BoC has already begun a cutting cycle to address domestic growth concerns and a weakening labor market, which may limit the upside potential for the CAD and support the USD/CAD pair.
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