USD/CAD extends its downside below 1.3750 on a softer US Dollar

• USD/CAD loses ground near 1.3730 on the softer USD on Thursday. 
• The BoC Governor said the central bank is  “getting closer” to rate cuts.
• The Fed has not changed its key interest rates and expressed more caution than previously about possible interest rate cuts. 

The USD/CAD pair extends its downside around 1.3730 during the early Asian trading hours. The downtick of the pair is backed by the weaker US Dollar Index (DXY) to 105.75. The US Federal Reserve (Fed) kept its benchmark short-term borrowing rate in a targeted range between 5.25% and 5.50% and expressed more caution than before over future interest rate cuts. Later in the day, the usual US weekly Initial Jobless Claims and March’s Goods Trade Balance are due.

Late Wednesday, Bank of Canada (BoC) Governor Tiff Macklem reiterated that the Canadian central bank is confident that inflation will continue to decline, adding that the BoC is  “getting closer” to rate cuts. Macklem added that the BoC isn't beholden to following the Federal Reserve's (Fed) playbook as higher rates in Canada are having ‘more traction’ than in the US. 

Traders place more bets that the Bank of Canada (BoC) might cut interest rates in June as Canada's economy weakened in the first quarter of this year. Canada’s GDP grew at a slower pace of 0.2% MoM in February, compared to the previous reading of  0.5%, weaker than the market expectation of 0.3% expansion. Elsewhere, the Canadian Manufacturing PM dropped to 49.4 in April and 49.8 in March, below the market consensus of 50.2, according to S&P Global on Wednesday. 

On the USD’s front, the US Fed kept rates unchanged for a sixth consecutive meeting in the 5.25%–5.50% range, as widely expected by market participants. Fed Chair Powell sounded more cautious than the previous reading, arguing for more patience on the policy front. The USD failed to capitalize following the monetary policy meeting as the bar was pretty high for an uber-hawkish pivot. However, the higher-for-longer rate narrative in the US could provide some support to the USD and cap the downside for USD/CAD.