USD/CAD Drops to 1.3750 on Expectations of Fed Rate Cut

USD/CAD Drops to 1.3750 on Expectations of Fed Rate Cut

The USD/CAD currency pair extended its decline to around 1.3755 during Thursday’s early Asian trading, as market sentiment tilted toward a near-certain expectation that the U.S. Federal Reserve will lower interest rates at its upcoming September policy meeting.

Investor confidence in a rate cut grew stronger following the release of U.S. Consumer Price Index (CPI) data for July, which showed core inflation rising slightly more than expected. According to the U.S. Bureau of Labor Statistics, the annual core CPI increased by 3.1% in July, exceeding the estimated 3.0% and up from the previous 2.9%.

This reinforced hopes among market participants that the Fed would begin easing monetary policy sooner than previously anticipated. As a result, the U.S. Dollar lost ground across the board, particularly against the Canadian Dollar.

Data from the CME FedWatch Tool now indicates that traders are pricing in a 94% probability of a 25 basis point rate cut in September, a noticeable jump from 85% before the CPI data release.

On the Canadian side, the Bank of Canada (BoC) remains more cautious. Some BoC members have recently expressed concerns that current interest rates may already be low enough to support economic growth, hinting at a potential pause in further cuts.

Markets now await the release of the U.S. Producer Price Index (PPI) later on Thursday, alongside weekly Initial Jobless Claims, both of which could further influence rate cut expectations and USD/CAD movement.