USD/CAD weakens below 1.3700 as signs of easing inflation spur Fed rate cut hopes

• USD/CAD edges lower to 1.3675 amid Monday’s Asian session. 
• The softer US PCE inflation boosts the Fed rate cut hopes, weighing on the pair. 
• Higher crude oil prices continue to underpin the commodity-linked Canadian Dollar. 

The USD/CAD pair trades on a softer note around 1.3675 during the Asian session on Monday. The signs of easing inflation in the United States boost the Fed rate cut hopes, which undermine the US Dollar (USD). Investors will take more cues from the US ISM Manufacturing PMI for June, which is due on Monday. 

Data released from the Commerce Department on Friday revealed that the US core PCE, the Federal Reserve’s (Fed) preferred inflation measure, rose 2.6% year over year in May from 2.8% in April, matching the forecast. Meanwhile, the headline PCE climbed 2.6% YoY in May from 2.7% prior, in line with the estimation. The softer US inflation data drags the Greenback lower against the Loonie. San Francisco Federal Reserve Bank President Mary Daly said that it's really challenging to look anywhere and not see monetary policy working: we have growth slowing, spending slowing, the labor market slowing, inflation coming down.”

On the Loonie front, the rise in crude oil prices provides some support to the commodity-linked Canadian Dollar (CAD). It's worth noting that higher oil prices could support the CAD, as Canada is the major crude oil exporter to the United States.

Additionally, inflation remained elevated in Canada in May, raising doubts about the Bank of Canada's (BoC) next interest rate decision. “The Bank of Canada will hold off until September for a second rate cut and then move again in December. Rate cuts are expected to continue throughout 2025 before the overnight rate settles at a neutral level of 2.75% by the end of next year,” according to Deloitte’s Economic Outlook Summer 2024.