USD/CAD Flatlines Around 1.3575 Area Amid Fed-Inspired USD Selloff

• USD/CAD is struggling to attract any significant buyers amid broad USD weakness.
• Bets on a bigger Fed rate cut, along with a positive risk tone, weigh heavily on the money.
• This week’s stronger recovery in oil prices supports the Loonie and acts as a headwind.

The USD/CAD pair is reversing a modest decline in the Asian session and is currently trading around the 1.3575 region, almost unchanged for the day, although any significant upside move still appears elusive.

The US dollar (USD) fell to a more than one-week low amid rising expectations for an outsized rate cut by the Federal Reserve (Fed) next week, supported by signs of easing US inflationary pressures. In fact, data released on Thursday showed that the annual producer price index (PPI) fell to 1.7 percent from the previous month’s downwardly revised reading of 2.1 percent. In addition, core PPI, which excludes volatile food and energy prices, missed consensus estimates and came in 2.4% from a year ago in the reported month.

Markets reacted quickly and now have more than a 40% chance that the US central bank will cut borrowing costs by 50 basis points at its September 17-18 policy meeting. This keeps US Treasury yields low near the 2024 low, which along with a risk-on positive tone weighs on the USD and acts as a headwind for the USD/CAD pair. Additionally, this week’s nice recovery in crude oil prices from June 2023 lows should support the commodity-linked Loonie and help cap spot prices.

Market participants now look forward to Friday’s economic report – which includes the release of the preliminary US consumer sentiment index from Michigan and second-tier data from Canada. Apart from this, US bond yields and broader risk sentiment could influence USD demand, which together with oil price dynamics, could allow traders to take short-term opportunities around the USD/CAD pair. However, spot prices look poised for modest weekly gains, although bulls need to wait for acceptance above the 1.3600 level before placing new bets.