USD/CAD faces pressure near 1.3600 as US dollar weakens ahead of Fed policy

• USD/CAD is underperforming below 1.3600 with Fed policy on the horizon.
• Investors will be paying close attention to the size of the Fed’s rate cut and the dot chart.
• The BoC is expected to cut interest rates again in October.

The USD/CAD pair remains below the crucial 1.3600 resistance in the North American session on Wednesday. The loonie asset is facing selling pressure as the US dollar (USD) underperforms against its major peers ahead of the Federal Reserve’s (Fed) monetary policy decision at 18:00 GMT.

Market sentiment appears to be upbeat as risk-adjusted assets perform strongly with growing confidence that the Fed will deliver a 50 basis point (bps) rate cut. The US Dollar Index (DXY), which tracks the greenback against six major currencies, is down to near 100.70.

The Fed’s message would be clear that officials are very concerned about deteriorating labor market conditions if it starts the policy easing cycle with a huge interest rate cut. This could lead to more downside for the US dollar and open the way for outward flows to emerging economies.

In addition to the likely size of the Fed’s interest rate cut, investors will focus on the dot chart and economic projections. The Fed Dot Chart shows where policymakers see federal funds rates headed in the short and long term.

Meanwhile, the Canadian dollar (CAD) remains under pressure as the Bank of Canada (BoC) is expected to expand monetary policy further. The BoC has already cut interest rates by 75 basis points (bps) this year to 4.25%. Market expectations for more BoC rate cuts rose after Tuesday’s consumer price index (CPI) data for August came in weaker than expected. The Canadian CPI report showed headline inflation returning to the bank’s target of 2 per cent, rising more slowly than estimates of 2.1 per cent and the previous release of 2.5 per cent. The Bank of Canada’s (BoC) core CPI measure fell further to 1.5% from 1.7% in July.