USD/CAD declined as the US Dollar lost strength, reflecting growing market expectations that the Federal Reserve will halt interest rate increases. The CME FedWatch Tool indicates that traders are pricing in approximately an 84% probability that the Federal Reserve will maintain current interest rates this month. Commodity-linked CAD may face challenges as WTI declines in response to US sanctions waivers on Russia aimed at enhancing global oil supply. USD/CAD inched higher following a bearish gap at the opening, yet it remains in negative territory, trading around 1.4120 during the Asian hours on Monday. The currency pair remains subdued as the US Dollar struggles under fading expectations for a Federal Reserve rate hike in October.
Market sentiment experienced a notable shift following remarks from Fed Chairman Kevin Warsh at an International Monetary Fund event on Friday. He emphasised that he does not prejudge interest-rate decisions and refrained from providing any definitive guidance regarding the central bank’s intentions for short-term rates at the forthcoming meeting on October 27-28. Market expectations for a rate increase have diminished considerably. According to the CME FedWatch Tool, traders are currently assigning an approximately 83.9% likelihood that the Fed will maintain interest rates at their current levels later this month, a significant increase from the 49% probability reflected just a month prior.
The USD/CAD pair may appreciate as the commodity-linked Canadian Dollar could encounter difficulties due to declining oil prices. Crude oil prices experienced a decline after US President Donald Trump opted to waive significant sanctions and tariffs on Russia, a decision anticipated to enhance Russian fuel exports. The executive order signed on Friday halted the restrictions imposed by the Graham Act, legislation that Trump had enacted only the previous month in response to pressure from lawmakers aiming to penalise Moscow for its actions in Ukraine. Secretary of State Marco Rubio indicated that the president will require as much as 60 days to assess the economic ramifications of this waiver.
Economists indicate that the release of Canadian inflation data on Monday, in conjunction with the BoC’s Q3 Business Outlook Survey, will be closely examined for indications that price pressures are becoming increasingly entrenched. They observe that markets will be monitoring “closely for signs on whether inflation pressures from persistently elevated energy prices are broadening and permeating across the economy,” a development that would complicate the policy outlook ahead of the Oct. 28 decision.
