The USD/CAD pair remains on the defensive around 1.3655 during the early Asian session on Tuesday. The USD Index (DXY) retreats from nearly two-month tops to 105.50, exerting some selling pressure on the pair. Investors will focus on the Canadian Consumer Price Index (CPI) inflation report, which is forecast to cool slightly for the year through May.
Late Monday, the Bank of Canada (BoC) Governor Tiff Macklem said that the Canadian economy is on track for a soft landing where the central bank doesn’t need a large rise in the unemployment rate to achieve the inflation target. Macklem further stated that it's reasonable to expect additional rate cuts. This speech came two weeks after the Canadian central bank lowered its policy interest rate to 4.75% from 5%, the first rate cut in four years. The Canadian Dollar (CAD) strengthens, even though investors expect that the BoC will deliver more rate cuts this year.
Meanwhile, the rise in crude oil prices amid renewed hopes of a summertime upswing in fuel demand continues to underpin the commodity-linked Loonie. It's worth noting that higher oil prices could support the CAD as Canada is the major crude oil exporter to the United States.
On the USD’s front, the US Federal Reserve (Fed) officials maintain a cautious stance on rate cuts, highlighting that their decisions would remain data-dependent. On Monday, San Francisco Fed President Mary Daly said that the Fed must continue the work of fully restoring price stability without a painful disruption to the economy. Daly added that while the central bank still has "more work to do" on bringing inflation down, inflation is not the only risk they face.
Traders will take more cues from the crucial US economic data this week. The revision of US Gross Domestic Product (GDP) for the first quarter will be released on Thursday. On Friday, the Personal Consumption Expenditure (PCE) Price Index will be published. Traders are now pricing in a 66% odds of Fed rate cut in September, up from 59.5% at the end of last week, according to the CME FedWatch Tool.
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