The USD/CAD currency pair is facing challenges in attracting buyers as broader weakness in the US dollar, influenced by dovish sentiments from the Federal Reserve, keeps the pair under pressure. Additionally, declining crude oil prices are putting further strain on the Canadian dollar, the Loonie. Traders are likely exercising caution ahead of the upcoming Federal Open Market Committee (FOMC) meeting, which is generating considerable anticipation among market participants.
On Friday, the USD/CAD pair saw some dip-buying, yet it struggled to maintain momentum, staying below the crucial 1.3600 level during early trading. Crude oil prices have recently hit a plateau after a strong recovery earlier in the week, following concerns about potential supply disruptions due to Hurricane Francine in the Gulf of Mexico. Coupled with a grim demand outlook — OPEC’s recent downward revisions regarding global oil demand growth — these factors are maintaining downward pressure on oil prices. The International Energy Agency also noted that demand is expected to rise less than previously thought, particularly due to weakened demand from China, which further coupled with the oil price situation is detracting from the Canadian dollar’s strength.
While the USD/CAD pair faces resistance, the overall US dollar weakness may cap its upside. Market expectations have shifted towards the possibility of a more aggressive stance by the Fed, with a nearly 45% chance of a 50 basis point rate cut anticipated at the September 18 meeting. Recent economic indicators suggest inflationary pressures are easing, with the Producer Price Index indicating a lower-than-expected annual rise, fueling speculation regarding potential rate cuts.
Traders may adopt a wait-and-see approach leading up to the critical FOMC meeting next week. Additionally, the upcoming release of the Preliminary Michigan US Consumer Sentiment Index could provide further trading cues. For the USD/CAD pair, sustaining strength above 1.3600 will be crucial for any potential recovery rally, while slipping below 1.3565 could indicate further downside risks, potentially driving the pair towards February lows near 1.3360 – 1.3355.
