USD/CAD Holds Firm Above 1.3750 as US CPI Supports Fed Cut Bets, Oil Prices Weigh on Loonie

USD/CAD Gains as Lower Oil Prices Hurt CAD and US CPI Strengthens Rate Cut Expectations

Loonie weakens as crude oil declines
USD/CAD edged higher to near 1.3780 during the early Asian session on Wednesday. The pair remains firm above the 1.3750 level as falling crude oil prices weigh on the commodity-linked Canadian Dollar (CAD). Weakness in energy markets, a major export sector for Canada, typically drags the Loonie down, giving an advantage to its US counterpart.

US CPI reinforces case for Fed rate cut
On the data front, US inflation for July came in slightly below expectations. According to the U.S. Bureau of Labor Statistics (BLS), the Consumer Price Index (CPI) rose by 2.7% year-over-year, missing the forecast of 2.8%. Meanwhile, the core CPI, which strips out food and energy, increased by 3.1% — a notch higher than the expected 3.0% and also above June’s 2.9%.

While core inflation remains sticky, the overall CPI print and signs of labor market softness are strengthening the argument for rate cuts by the Federal Reserve. The CME FedWatch Tool now shows a 94% probability of a rate cut in September, up from 85% before the CPI release. Bets are also increasing for further cuts in October and December.

Fed speakers in focus
Later today, traders will be tuning in to comments from Fed officials Austan Goolsbee and Raphael Bostic for further signals on policy direction. Despite supportive inflation data for easing, persistent core inflation and labor market concerns keep the Fed in a cautious position.

Outlook
While USD/CAD is supported by diverging central bank expectations and oil market weakness, its upside may be limited if dovish Fed rhetoric intensifies or if crude oil prices stabilize. Volatility may increase in response to upcoming US macroeconomic releases and commentary from Fed policymakers.