USD/CAD finds interim support near 1.3600 as focus shifts to US core PCE Inflation data

• USD/CAD bounces back from 1.3600 as US Dollar recovers due to diminished Fed rate-cut bets.
• Fed officials want to see inflation easing for months before lowering interest rates.
• The BoC is expected to start unwinding the restrictive monetary policy stance from June.

The USD/CAD pair finds a temporary cushion near the round-level support of 1.3600 in Tuesday’s New York session. The Loonie asset finds buying interest as the US Dollar shows some signs of recovery after posting fresh weekly low. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, bounces back from 104.35.

Buying interest in the US Dollar is prompted by diminished bets that were leaned towards a rate-cut move by the Federal Reserve (Fed) in the current interest rate framework in the September meeting. This has also impacted the risk-on market sentiment. The S&P 500 has turned slightly negative at open. 10-year US Treasury yields recover to 4.48%. Fading Fed rate-cut prospects is a favorable scenario for US bond yields.

The reasoning behind traders paring Fed rate-cut bets is uncertainty over progress in the disinflation process. April’s Consumer Price Index (CPI) report showed that inflation slowed after remaining stubbornly higher for three months. However, Fed officials believe that the slowdown in price pressures in April doesn’t appear to be long-lasting.

Fed policymakers want to see inflation declining for months to gain confidence that price pressures will sustainably return to the desired rate of 2%. This week, investors will focus on the core Personal Consumption Expenditure Price Index (PCE) data for April, which will be published on Friday. The Fed’s preferred inflation measure is estimated to have grown steadily on monthly and annual basis at 0.3% and 2.8%, respectively. Steady inflation growth would prompt the likelihood of interest rates remaining at higher levels.

Meanwhile, the Canadian Dollar could come under pressure as investors hope that the Bank of Canada (BoC) will start reducing interest rates from the June meeting. Market participants expect that situation for a rate-cut is ripe as BoC’s preferred core CPI data that excludes eight volatile components has come down to 1.6% on an annual basis. Also, Canada’s Retail Sales are contracting from the past three months.