The USD/CAD pair continues its downward trajectory for a second consecutive day, trading around 1.4150 during Thursday’s Asian session. The pair has retreated from Wednesday’s high of 1.4194, marking its highest level since April 2020, as the Canadian Dollar (CAD) strengthens following a more dovish stance from the Bank of Canada (BoC) on future interest rate cuts.
On Wednesday, the BoC implemented another significant 50 basis point rate cut, lowering the main interest rate to 3.25%. Despite recent upticks in inflation, Canada’s Unemployment Rate has reached multi-year highs, prompting the BoC to signal a more gradual approach to future monetary easing.
BoC Governor Signals Gradual Approach to Rate Cuts
BoC Governor Tiff Macklem indicated that the central bank plans to take a more measured approach to monetary policy, stating, “We anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected.” He further noted that the need for restrictive monetary policy is no longer as urgent, which has provided support to the Canadian Dollar and contributed to the ongoing retreat in USD/CAD.
US Inflation Data Supports Fed Rate Cuts
Broader market sentiment remained stable after the release of the US Consumer Price Index (CPI) for November, which matched expectations. The US CPI rose to 2.7% year-over-year in November, up slightly from 2.6% in October. On a monthly basis, the headline CPI increased by 0.3%, in line with forecasts. Meanwhile, core CPI, which excludes food and energy, rose 3.3% YoY and 0.3% MoM, also in line with market expectations.
Despite the CPI data, the report does not appear to be sufficient to prevent the Federal Reserve from proceeding with rate cuts. The CME FedWatch Tool suggests an almost 99% probability that the Fed will reduce rates by 25 basis points at its December 18 meeting. Traders are now awaiting the US November Producer Price Index (PPI), due later on Thursday, for further clues on inflationary pressures and potential policy moves by the Fed.
In summary, the USD/CAD pair is facing downward pressure due to the BoC’s cautious approach to future rate cuts and strengthening economic data from Canada. Meanwhile, expectations of Fed rate cuts in December are adding to the bearish sentiment for the US Dollar.
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