USD/CAD remains subdued below 1.3700 amid weak US Dollar

• USD/CAD edges lower due to a vulnerable US Dollar.
• The Fed is widely anticipated to begin reducing interest rates from September.
• Further decline in Canada’s inflation has prompted BoC’s subsequent rate-cut hopes.

The USD/CAD pair exhibits a subdued performance below the round-level resistance of 1.3700 in Wednesday’s New York session. The Loonie asset remains under pressure as the US Dollar (USD) has fallen on the backfoot. The US Dollar weakens as investors see the Federal Reserve (Fed) to begin reducing interest rates from the September meeting.

The US Dollar Index, which tracks the Greenback’s value against six major peers, registers a fresh four-month low near 103.70. More downside remains likely as trades are pricing in two rate cuts this year against one signalled by latest dot plot.

Market expectations for Fed rate cuts were prompted by cooling inflationary pressures and signs that the labor market lose momentum. Recent annual inflation readings were softer-than-expected. Also, monthly headline inflation deflated for the first time in more than four years, pointed to progress in disinflation after stalling in the first quarter. Meanwhile, the labor demand has slowed and the Unemployment Rate has risen to 4.1%.

Soft inflation reading have also boosted confidence of Fed officials that price pressures will return to the desired rate of 2%. In the American trading hours, Fed Governor Christopher Waller communicated confidence over moderation in job market and inflation. When asked about rate cuts, Waller said, “I do believe we are getting closer to the time when a cut in the policy rate is warranted," Reuters reported.

On the Canadian Dollar front, expectations for the Bank of Canada (BoC) delivering subsequent rate cuts have been mounted due to further decline in price pressures. The data showed on Tuesday that monthly headline Consumer Price Index (CPI) deflated. However, economists anticipated the inflation data to have grown at a slower pace of 0.1% from the former release of 0.6%. Annual headline CPI decelerated to 2.7% from May’s reading of 2.9%.