In early Asian trading on Friday, the USD/CAD pair weakened to around 1.3630 after bouncing back from two-month lows near 1.3588. This decline was triggered by lower-than-expected US inflation data for June, which has increased expectations of a Federal Reserve rate cut in September, putting pressure on the US Dollar. The Consumer Price Index (CPI) fell 0.1% month-on-month in June, marking the lowest level in over three years. The core CPI, which excludes volatile food and energy prices, also showed a decrease. As a result, investors in the fed funds futures market are now pricing in a nearly 89% chance of a rate cut at the September Fed meeting.
On the Canadian side, the Unemployment Rate rose to 6.4% in June, with the economy shedding 1,400 jobs. This has led to speculation that the Bank of Canada may also cut interest rates further. While this could weaken the Canadian Dollar, the recovery of crude oil prices, as Canada’s major export, may help limit losses for the CAD. Overall, economic data and central bank decisions will continue to influence the direction of the USD/CAD pair in the near term.