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• USD/CAD weakens to around 1.3950 in Tuesday’s early Asian session.
• Moody’s downgrades the US credit rating to ‘AA1’, weighing on the US Dollar.
• A dovish turn from the BoC has fueled speculation of a June rate cut. 

The USD/CAD pair softens to near 1.3950 during the early Asian session on Tuesday. The Greenback edges lower against the Canadian Dollar (CAD) on a surprise downgrade of the US government's credit rating late on Friday and renewed trade tensions. Traders will keep an eye on the Canadian Consumer Price Index (CPI) inflation data, which is due later on Tuesday.

Moody’s downgrade of America’s sovereign rating to ‘AA1’ from ‘AAA,’ along with rising expectations that the Federal Reserve (Fed) will soon start cutting rates amid cooling US inflation, have eroded the US Dollar’s (USD) appeal.  The downgrade underscores growing concerns over fiscal deterioration and tariff-induced distortions under US President Donald Trump. 

Fed officials maintain caution and call for more clarity before committing to policy changes, which caps the upside for the USD. The markets are now pricing in a nearly 91.6% odds of rates holding at 4.25%–4.50% in the June meeting and a 65.1% chance of no change in July, according to the CME FedWatch tool. 

Meanwhile, a decline in Crude Oil prices could undermine the commodity-linked Loonie. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD value. 

Nonetheless, dovish expectations for the Bank of Canada (BoC) after lackluster April job gains and a rise in unemployment might weigh on the CAD and create the pair’s downside. Capital Economics analysts said that US tariffs are finally weakening the Canadian economy, increasing the likelihood of BoC rate reductions at an aggressive pace.

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