USD/CAD approaches 1.3750 as Fed to delay rate cuts

• USD/CAD jumps to 1.3735 as the Canadian Dollar weakens on dismal market sentiment.
• Investors turn risk-averse as trades priced out Fed rate cut hopes for June.
• BoC Macklen sees expectations for the Fed pivoting to rate cuts in June as reasonable.

The USD/CAD pair is advancing towards 1.3750 in Friday’s London session. The Loonie asset extends its winning spell for the third trading session as investors see the Federal Reserve (Fed) pivoting to rate cuts by the third quarter of this year.

Speculation about the Fed delivering rate cuts has waned as consumer price inflation in the United States turned sticky in March. Also, the core Producer Price Index (PPI) data, which shows an increase or decrease in the prices of goods and services, excluding food and energy prices, by owners at factory gates, remains hotter than expected. The annual core PPI grew by 2.4% from estimates of 2.3% and the prior reading of 2.0%.

For now, investors anticipate that the Fed could begin reducing interest rates after the September meeting. Also, investors expect that there will be two rate cuts instead of three, as projected by Fed policymakers in the latest dot plot.

Faded expectations for the Fed lowering interest rates from the June meeting have dented appeal for risk-sensitive assets. S&P 500 futures have posted some losses in the European session. The US Dollar Index (DXY) extends its upside to 105.85. The scenario of the Fed keeping interest rates higher for a longer period bodes well for the US Dollar.

On the Loonie front, the Canadian dollar has weakened due to firm market expectations that the Bank of Canada (BoC) will start lowering borrowing rates in June. After maintaining the status quo on Wednesday, BoC Governor Tiff Macklem said a rate cut in June is possible.

Going forward, expectations of more upside in global oil prices due to escalating geopolitical tensions could support the Canadian Dollar. Fears of Iran’s confrontation with Israel heightened after air strikes on the Iranian embassy in Damascus by the Israeli forces. Also, Israel is preparing to invade Rafae where displaced Palestinians have sheltered.

It is worth noting that Canada is the leading oil exporter to the United States, and higher oil prices support the Canadian Dollar.