USD/CAD climbs to near 1.3700 as US Dollar extends recovery amid dismal market mood

• USD/CAD rises further to near 1.3700 due to a strong recovery in the US Dollar.
• The US Dollar capitalizes on a significant decline in Fed rate-cut bets for September.
• Investors expect that the BoC will start unwinding its restrictive policy stance.

The USD/CAD pair jumps to near the round-level resistance of 1.3700 in Wednesday’s New York session. The Loonie asset strengthens as the US Dollar extends recovery. The US Dollar Index (DXY), which tracks the Greenback’s value against ix major currencies, moves higher to 104.85 as uncertainty over Federal Reserve’s (Fed) rate-cut timeframe deepens.

Increasing likelihood that the Fed will not cut interest rates before the fourth quarter of the year has dampened risk-appetite of investors. The S&P 500 has opened on a bearish note, reflecting weak appeal for risk-sensitive assets. 10-year US Treasury yields post a fresh three-week high at 4.60% as deepening expectations that the Fed will keep interest rates higher for longer is a favorable situation for them.

The CME FedWatch tool shows that the probability for Fed reducing interest rates from their current levels in the September meeting has come down to 47.6% from 57.5% recorded a week ago. Now investors are seeing the November meeting as the earliest point from when the Fed could return to policy normalization.

Going forward, investors will focus on the United States core Personal Consumption Expenditure Price Index (PCE) data for April, which will be published on Friday. The underlying inflation data will influence market speculation for Fed rate cuts in September.

Meanwhile, the Canadian Dollar weakens as investors expect that the Bank of Canada (BoC) will start reducing interest rates from the June meeting. The upside risks to Canada’s inflation have faded as the higher interest rates have deepened the household crisis. Also, the economy is failing to achieve full employment levels.