USD/CAD drops vertically to 1.3400 as USD falls, Canada CPI rises

• The USD/CAD pair is pressured by selling, while the US Dollar undergoes a sharp correction pending the Fed’s policy.
• Canada’s headline CPI grew at a pace of 0.4%, while the annual CPI accelerated sharply to 4%.
• The Bank of Canada could keep its interest rate policy stable as core inflation remains stable.

The pair USD/CAD suffered heavy selling as the US dollar weakened ahead of the Federal Reserve (Fed) interest rate decision. The pair also faces selling pressure as Statistics Canada reported that the headline Consumer Price Index (CPI) expanded at a pace of 0.4% versus expectations of 0.2%.

Annual headline inflation accelerated sharply to 4% versus estimates of 3.8% and the previous release of 3.3%. The core CPI, which excludes oil and food price volatility, rose nominally by 0.1%, indicating moderate demand for non-durable goods and services. On an annualized basis, the core CPI rose to 3.3%.

August Canadian inflation is not expected to force the Bank of Canada (BoC) into a further interest rate hike as core inflation remains stable, which is generally considered for the monetary policy framework.

Meanwhile, the US Dollar Index (DXY) continues a two-day streak of losses as the Fed is expected not to raise interest rates in its September monetary policy on Wednesday. This would be the second time the Fed is expected not to raise interest rates in its historically aggressive tightening period that began in March 2022.

According to CME Group’s Fedwatch tool, traders expect interest rates to remain stable between 5.25% and 5.50% following Wednesday’s meeting of the Federal Open Market Committee (FOMC). For the rest of the year, traders predict a nearly 58% chance that the Fed will also keep its monetary policy unchanged.

Investors would be watching for comments on rate cuts as the U.S. manufacturing sector faces turbulent times. U.S. companies are operating at lower capacity and working to achieve operational efficiency by controlling costs through lower inventory due to a deteriorating demand environment.