USD/CAD Remains On The Defensive Around 1.3650 Ahead Of Canadian Inflation Data

USD/CAD remained on the defensive around 1.3655 in early Asian trading on Tuesday. The U.S. dollar index (DXY) retreated from nearly two months to 105.50, exerting some selling pressure on USD/CAD. Investors will focus on Canada’s Consumer Price Index (CPI) inflation report, which expects inflation to fall slightly in the year to May.

Late Monday, Bank of Canada Governor Tiff Macklem said that Canada’s economy is on track for a soft landing and the central bank does not need a sharp increase in unemployment to achieve its inflation target. Macklem also said it is reasonable to expect further interest rate cuts. The speech came two weeks after the Bank of Canada cut its policy rate from 5% to 4.75%, the first rate cut in four years. The Canadian dollar (CAD) remained strong despite investors expecting further rate cuts from the Bank of Canada this year.

Meanwhile, rising crude oil prices on the back of a potential recovery in fuel demand in the summer continued to support the commodity-linked Canadian dollar. It is worth noting that rising oil prices may support the Canadian dollar as Canada is a major crude oil exporter to the United States.

On the dollar side, Federal Reserve officials maintained a cautious stance on rate cuts, emphasizing that their interest rate decisions will still depend on data. On Monday, San Francisco Fed President Mary Daly said that the Fed must continue to work to fully restore price stability without causing painful disruptions to the economy. Daly added that while the central bank still has “more work to do” to reduce inflation, inflation is not the only risk they face.

Traders will get more clues from crucial U.S. economic data this week. The revised value of U.S. first-quarter gross domestic product (GDP) will be released on Thursday. The personal consumption expenditures (PCE) price index will be released on Friday. The Chicago Mercantile Exchange FedWatch tool shows that traders are currently pricing in a 66% probability of a Fed rate cut in September, up from 59.5% last weekend.

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