The USD/CAD pair has extended its rally to around 1.4170 during the early European session on Monday, with the Canadian Dollar (CAD) weakening to a near four-and-a-half-year low. The decline comes as traders expect the Bank of Canada (BoC) to implement a significant interest rate cut at its upcoming December meeting.
Market expectations are that the BoC will reduce its benchmark rate by 50 basis points on Wednesday, following a similar move in October. This would bring the rate to 3.25%. According to Shaun Osborne, Chief Foreign Exchange Strategist at Scotiabank, the BoC’s dovish outlook is putting downward pressure on the CAD, and there are few indications that the currency will recover in the near term.
In addition to the BoC’s policy stance, concerns about potential US tariffs under a future Donald Trump administration may add further downward pressure on the CAD. President-elect Trump has indicated plans to impose steep tariffs on goods from Canada, Mexico, and China, which could hurt Canadian exports and the economy.
US economic data also weighed on market sentiment, with the Bureau of Labor Statistics reporting the addition of 227,000 new jobs in November, surpassing the market expectation of 200,000. The Unemployment Rate rose slightly to 4.2%, from 4.1% in October, but the overall labor market remains solid. Despite this, the data did not shift expectations regarding the Federal Reserve’s rate-cut trajectory, with the Fed still on track for a potential reduction in December.
Investors will closely monitor upcoming US inflation data, with the Consumer Price Index (CPI) and Producer Price Index (PPI) reports scheduled for release on Wednesday and Thursday. These data points are likely to play a key role in shaping the Fed’s decision on interest rates later this month.
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