USD/CAD trades sideways below 1.4400, BoC policy in focus

USD/CAD consolidates below 1.4400 as both the US Dollar and the Canadian Dollar are underperforming.
Trump’s economic policies are expected to dent US economic growth.
Investors await the US CPI data for February and the BoC’s policy decision, both are releasing on Wednesday.

Sagar Dua FXStreet

The USD/CAD pair trades in a tight range around 1.4370 in European trading hours on Monday. The Loonie pair consolidates as weakness in the US Dollar (USD) has been offset by declining Canadian Dollar (CAD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, struggles to hold the key support of 103.50, the lowest level seen in four months.

The Greenback is under severe pressure as market experts believe a slowdown in the United States (US) economy due to “America First” policies by President Donald Trump. Investors expect Trump's policies to be inflationary and pro-growth in the longer term but see severe economic turbulence in the near term.

Knowing that US employers are expected to be borne the impact of Trump’s tariff policies, they would be forced to pass on the impact to end consumers. Such a scenario would result in a sharp decline in the overall demand as higher prices would diminish the purchasing power of consumers. This assumption has led to an increase in market expectations that the Federal Reserve (Fed) will reduce interest rates in the June policy meeting. The probability of the Fed to cut interest rates in June has increased to 82% from 54% a month ago, according to the CME FedWatch tool.

For more cues on the interest rate outlook, investors will focus on the US Consumer Price Index (CPI) data for February, which will be released on Wednesday. On year, headline and core CPI are estimated to have decelerated to 2.9% and 3.2%, respectively.

Meanwhile, the Canadian Dollar is underperforming as Donald Trump has imposed 25% tariffs on Canada. However, a number of products that come under the purview of the purview of United States-Mexico-Canada Agreement (USMCA) have been exempted for a month.

This week, investors will pay close attention to the Bank of Canada’s (BoC) monetary policy decision, which will be announced on Wednesday. The BoC is expected to cut interest rates by 25 basis points (bps) to 2.75%.

Economic Indicator

BoC Interest Rate Decision

The Bank of Canada (BoC) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoC believes inflation will be above target (hawkish), it will raise interest rates in order to bring it down. This is bullish for the CAD since higher interest rates attract greater inflows of foreign capital. Likewise, if the BoC sees inflation falling below target (dovish) it will lower interest rates in order to give the Canadian economy a boost in the hope inflation will rise back up. This is bearish for CAD since it detracts from foreign capital flowing into the country.

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