USD/CAD faces pressure near 1.3600 as US Dollar weakens ahead of Fed policy

USD/CAD performs weakly below 1.3600 with Fed policy on the horizon.
Investors will keenly focus on the Fed rate cut size and dot plot.
The BoC is expected to cut interest rates again in October.

Sagar Dua FXStreet

The USD/CAD pair remains below the crucial resistance of 1.3600 in Wednesday’s North American session. The Loonie asset faces selling pressure as the US Dollar (USD) performs weakly against its major peers ahead of the Federal Reserve’s (Fed) monetary policy decision at 18:00 GMT.

Market sentiment appear to be cheerful as risk-perceived assets are performing strongly, with growing confidence that the Fed will deliver a 50-basis points (bps) interest rate cut. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declines to near 100.70.

The message from the Fed would be clear that officials are highly concerned over deteriorating labor market conditions, if it starts the policy-easing cycle with an outsize interest rate cut. This could result in more downside in the US Dollar and will pave way for foreign flows to emerging economies.

Apart from the Fed’s likely interest rate cut size, investors will focus on the dot plot and economic projections. The Fed dot plot indicates where policymakers see Federal Fund Rates heading in the short and long term.

Meanwhile, the Canadian Dollar (CAD) remains under pressure as the Bank of Canada (BoC) is expected to extend its monetary policy further. The BoC has already cut interest rates by 75 basis points (bps) this year to 4.25%. Market expectations for more BoC rate cuts rose after Tuesday’s Consumer Price Index (CPI) data for August, which came in softer-than-expected. The Canadian CPI report showed that the headline inflation returns to bank’s target of 2%, grew slower than the estimates of 2.1% and the former release of 2.5%. The Bank of Canada’s (BoC) core CPI measure decelerated further to 1.5% from 1.7% in July.

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).

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