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• USD/CAD declines due to a dovish sentiment surrounding the Fed’s policy trajectory in 2024.
• The US Dollar struggled as cooling inflation sparked discussions of the Fed implementing three rate cuts in this year.
• The upside of the commodity-linked CAD would be limited due to lower crude Oil prices.

USD/CAD pulls back after hitting an eight-month high at 1.3865 on Monday, trading around 1.3850 during the European hours on Tuesday. This downside is attributed to the dovish sentiment surrounding the US Federal Reserve’s (Fed) policy outlook in 2024

The US Federal Reserve (Fed) is expected to keep interest rates unchanged in Wednesday’s meeting. However, traders anticipate a Fed rate cut in September, with the CME FedWatch Tool indicating a 100% probability of at least a quarter percentage point cut. Additionally, signs of cooling inflation and easing labor market conditions in the United States have fueled expectations of three rate cuts by the Fed this year.

The downside of the USD/CAD pair could be limited as the US Dollar extends its gains due to risk aversion mood. However, the decline in US Treasury yields could put pressure on the Greenback and Loonie pair. 2-year and 10-year yields on US Treasury bonds stand at 4.39% and 4.18%, respectively, at the time of writing.

Meanwhile, the lower crude Oil prices exert downward pressure on the commodity-linked Canadian Dollar, limiting the downside of the USD/CAD pair. Given the fact that Canada is the biggest crude exporter to the United States (US). West Texas Intermediate (WTI) crude Oil price trades around $75.40 per barrel by the press time. WTI price extends its losses for the third session, attributed to a sluggish economic outlook in China and diminished supply concerns due to de-escalated Middle East tensions.

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