The USD/CAD pair is trading around 1.3655 in the early Asian session on Tuesday, with the USD Index (DXY) pulling back from recent highs at 105.50. Investors are keeping an eye on the Canadian Consumer Price Index (CPI) report, which is expected to show a slight cooling for the year through May.
Bank of Canada (BoC) Governor Tiff Macklem recently stated that the Canadian economy is heading towards a soft landing, with the central bank not needing a significant increase in the unemployment rate to meet inflation targets. Macklem also mentioned the possibility of further rate cuts, following the recent policy interest rate cut to 4.75%.
The Canadian Dollar (CAD) has strengthened despite expectations of more rate cuts by the BoC, supported by rising crude oil prices. Canada, being a major crude oil exporter to the US, benefits from the increase in oil prices.
On the US front, Federal Reserve (Fed) officials are maintaining a cautious approach to rate cuts, emphasizing that decisions will be data-dependent. Traders are awaiting key US economic data releases this week, including the revision of US Gross Domestic Product (GDP) for the first quarter and the Personal Consumption Expenditure (PCE) Price Index.
Market participants are currently pricing in a 66% chance of a Fed rate cut in September, up from 59.5% last week. The Fed remains focused on fully restoring price stability without causing disruption to the economy, with inflation not being the only risk they are monitoring.