USD/CAD holds steady near 1.3850, all eyes on Fed rate decision

• USD/CAD trades on a flat note near 1.3850 in Tuesday’s early Asian session. 
• The Fed is expected to keep rates unchanged at its July meeting on Wednesday. 
• Lower crude oil prices and the expectation of more rate cuts by the BoC continue to weigh on the Loonie. 

The USD/CAD pair trades flat around 1.3850 during the early Asian session on Tuesday. The Greenback is likely to be supported by the risk-off sentiment. Traders await on the sidelines ahead of the US Federal Reserve (Fed) Interest Rate Decision on Wednesday. 

Meanwhile, the USD Index (DXY), which measures the value of the USD versus a basket of global currencies, climbs to the highest level in nearly three weeks above the 104.50 barrier. The Fed monetary policy on Wednesday will be a closely watched event, which is anticipated to keep rates unchanged. Investors are now seeing that the first rate cut will come by mid-September, pricing in 100% of the Fed rate cut by least a quarter-percentage-point by then, according to data from the CME FedWatch Tool. 

Fed officials said that they are getting closer to having confidence that inflation is sustainably moving towards its 2% target. However, the central bank will take more cues from the rising unemployment, another sign that cuts may be nearing.

On the Loonie front, the fall in crude oil prices exerts some selling pressure on the commodity-linked Canadian Dollar (CAD). Lower oil prices generally drag the CAD lower as Canada is the leading exporter of Oil to the United States (US). Additionally, the expectation that the Bank of Canada (BoC) will continue to ease policy after its latest interest rate cut last week might further undermine the Loonie. Investors have priced in one more 25 basis points (bps) rate cut this year, with nearly 60% probability that the BoC will cut rates again in its September meeting.