A Battle of Expectations: BoC and Fed Policies Keep USD/CAD in Limbo

USD/CAD remains steady above 1.3800 amid continued market focus on expectations of a Bank of Canada (BoC) rate cut, which has kept downward pressure on the Canadian Dollar (CAD) and provided moderate support to the pair. During the Asian session on Tuesday, the pair edged higher but failed to generate significant bullish momentum due to mixed fundamental signals. The USD/CAD pair has held above the 100-day Simple Moving Average (SMA) and remains above the 1.3800 psychological level.

The recent weak Canadian employment data released on Friday has intensified market speculation for a 25-basis-point (bps) rate cut by the BoC at its meeting on September 17. This has exacerbated selling pressure on the CAD, making the BoC's monetary policy decisions a key factor influencing the USD/CAD cross. Additionally, the CAD's performance is being supported by a modest recovery in crude oil prices, given its status as a commodity-linked currency.

Meanwhile, the US Dollar (USD) has weakened in recent days, falling to a new low against the CAD since July 28, driven by expectations of more aggressive rate cuts by the Federal Reserve (Fed). Traders have increasingly priced in the possibility of a large rate cut at the upcoming Federal Open Market Committee (FOMC) meeting, triggered by the disappointing US Nonfarm Payrolls (NFP) report. This dynamic has capped upside potential for the USD/CAD pair.

The broader market environment also plays a role in USD/CAD’s limited movement. The upbeat risk sentiment has reduced the USD’s appeal as a safe-haven currency, further complicating directional positioning for the pair. Traders are closely watching upcoming key economic data, including the US Producer Price Index (PPI) and Consumer Price Index (CPI) reports on Wednesday and Thursday, for further clarity on inflation trends and the Fed's policy path.

Over the past seven days, the USD has appreciated the most against the CAD, with a 0.82% gain, according to cross-currency performance data. In contrast, the CAD depreciated 0.82% against the USD. This reflects the ongoing influence of divergent monetary policy expectations between the BoC and the Fed. The USD's relative strength is also evident against other major currencies, particularly the Australian Dollar (AUD) and New Zealand Dollar (NZD), which have seen larger declines.

In summary, the USD/CAD pair is currently in a consolidation phase above 1.3800 amid conflicting influences from BoC rate cut expectations and a weaker USD due to Fed easing forecasts. While the CAD faces downward pressure from the anticipated BoC cut, the USD’s strength is being constrained by broader market expectations for a more aggressive Fed easing cycle. Traders are advised to remain cautious and await key upcoming data releases to determine the pair’s next directional move.