The USD/CAD pair retraced slightly after reaching its highest level since March 2020 during the Asian session on Monday, ending a two-day winning streak. The pair currently trades in the mid-1.4400s, down 0.10% on the day, despite a modest US Dollar (USD). However, the downtick lacks follow-through and does not signal a strong bearish trend.
US Inflation and Fed Rate Cut Expectations Weigh on USD
Recent signs of easing inflation in the United States have increased the likelihood that the Federal Reserve could cut interest rates twice this year. This dampened the potential for further USD gains following Friday’s positive move. Additionally, a generally positive risk sentiment in the equity markets is seen exerting downward pressure on the safe-haven USD.
However, concerns over US President-elect Donald Trump’s protectionist policies, which could drive inflation, keep investors on edge. This raises the possibility that the Federal Reserve may adopt a more hawkish stance, providing some caution for USD bears.
Oil Price Declines Support USD/CAD as Loonie Weakens
Meanwhile, easing tensions in the Middle East and expectations that President-elect Trump might relax sanctions on Russia in exchange for a deal to end the Ukraine conflict have offset concerns about tighter global oil supplies. This has contributed to a decline in Crude Oil prices, which typically weigh on the commodity-linked Canadian Dollar (Loonie), helping limit the USD/CAD pair’s losses.
Traders are cautious ahead of Trump’s inaugural address later today, with many opting to wait for more clarity before positioning for a potential deeper pullback in the pair.
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