USD/CAD Rises Above 1.3700 As USD Rebounds Ahead Of Fed Chairman Powell’s Speech

USD/CAD rose to around 1.3745 during early European trading on Tuesday. The pair’s gains were supported by a stronger dollar and rising U.S. Treasury yields. Canada’s June S&P Global Manufacturing Purchasing Managers’ Index (PMI) is due later this week and is expected to rise to 50.2 from 49.3 in May. In addition, a speech by Federal Reserve (Fed) Chairman Jerome Powell will also be closely watched.

Weaker-than-expected U.S. ISM Manufacturing Purchasing Managers’ Index for June supported the view that the Federal Reserve will cut interest rates in September. According to data from the CME FedWatch tool, traders currently see a nearly 68% chance that the Fed will cut interest rates in September, up more than 20 percentage points from a month ago. San Francisco Fed President Mary Daly said the U.S. central bank remains data-dependent and has not made an estimate of the future policy path. Despite a slew of weak U.S. economic data, the cautious tone of Fed officials continues to support the U.S. dollar (USD) in the short term.

The Bank of Canada (BoC) cut interest rates to 4.75% on June 5, becoming the first G7 country to ease monetary policy in this monetary policy cycle. At a press conference, BoC Governor Tiff Macklem said Canada has the ability to cut rates, but there are limits to the BoC’s divergence from the Fed and they are not approaching those limits.

“This is indeed likely to be the first in a series of rate cuts, although the series of rate cuts will not be a straight line down by any means. The tone of the BoC was a little more dovish than expected, but each rate cut this year will require evidence of stabilizing inflation,” said Douglas Porter, chief economist at BMO Economics.

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