The USD/CAD pair eased slightly on Monday, trading around 1.4230, after reaching a multi-year high of 1.4245 on Friday. The pullback comes amid a softer US Dollar, driven by muted US Treasury yields, as markets await the Federal Reserve’s (Fed) interest rate decision. There is an increasing expectation that the Fed will implement a 25 basis point rate cut in its final policy meeting of 2024.
Analysts predict that the Fed is likely to cut rates, while signaling a pause in future rate changes, given the strength of the US economy and persistent inflation above the 2% target. The CME FedWatch tool now shows a nearly 100% probability of a 25 basis point rate cut at the Fed’s December meeting.
Canadian Dollar Faces Headwinds from BoC Policy and Tariff Concerns
The Canadian Dollar (CAD) continues to face pressure as the Bank of Canada (BoC) takes a more dovish stance. Last week, the BoC cut its benchmark borrowing rate by 50 basis points to 3.25%, as expected, but signaled a more gradual approach to easing as policy rates have already been significantly reduced. BoC Governor Tiff Macklem also warned of the potential impact of US President-elect Donald Trump’s proposed tariffs on Canadian exports, further weighing on the CAD.
Despite these challenges, the CAD may find some support from rising crude oil prices. The likelihood of tighter oil supplies, fueled by the imposition of additional US sanctions on major producers like Russia and Iran, could help boost the commodity-linked currency. West Texas Intermediate (WTI) oil is trading around $70.50 per barrel, providing some upward momentum for the CAD.
Geopolitical Risks Add to Market Tension
In addition to the Fed and BoC decisions, geopolitical developments are also influencing market sentiment. US Treasury Secretary Janet Yellen announced that the United States is considering further sanctions on “dark fleet” tankers and may impose sanctions on Chinese banks to curb Russia’s oil revenue and its access to foreign supplies. These sanctions are seen as a strategy to limit Russia’s financial resources amid its ongoing war in Ukraine.
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