USD/CAD softens below 1.4250 ahead of Canadian CPI inflation data

• USD/CAD drifts lower to around 1.4235 in Tuesday’s Asian session. 
• Fed is likely to cut interest rates by 25 bps at the December meeting on Wednesday.
• BoC Governor Tiff Macklem said the central bank is preparing for a shock-prone’ future.

The USD/CAD pair weakens to near 1.4235, snapping the three-day winning streak during the Asian trading hours on Tuesday. The Canadian November Consumer Price Index (CPI) inflation data is due later on Tuesday. Meanwhile, the US Dollar Index (DXY), a measure of the USD's value relative to its most significant trading partners' currencies, edges lower to around 106.75 as traders await the US Federal Reserve (Fed) interest rate decision on Wednesday for fresh catalysts. 

Markets widely expect the Fed to lower its benchmark interest rate by a smaller 25 basis points (bps) at its December meeting on Wednesday as the US economy faces sticky inflation and a cooler labor market. After the meeting, Fed Chair Jerome Powell’s press conference and the updated economic projections will be closely watched. If the Fed officials deliver hawkish comments or signal a slowdown in rate cuts, this could boost the Greenback against the Canadian Dollar (CAD). 

"We think that the economic forecasts will show better growth and firmer inflation this year and that the median interest rate forecast dots will be revised to show three cuts next year instead of four, as in the September dots," said JPMorgan chief US economist Michael Feroli.

On the other hand, soft language from Bank of Canada (BoC) Governor Tiff Macklem could weigh on the Loonie. BoC’s Macklem said on Monday that the Canadian central bank is preparing for a future that looks more uncertain and more prone to shocks. Macklem added that the BoC will assess the need for further reductions in the policy rate one decision at a time and expects a more gradual approach to monetary policy if the economy evolves as expected.