USD/CAD finds cushion near 1.3650, reversal likely on firm BoC rate-cut bets

• USD/CAD finds interim support near 1.3650 on firm speculation that the BoC will announce a rate cut on June 5.
• The US Dollar is expected to recover as expectations for the Fed pivoting to rate cuts in September have come down significantly.
• Trading volume is expected to remain light in Monday’s session on account of the holiday in US markets.

The USD/CAD pair trades in a tight range slightly above the crucial support of 1.3650 in Monday’s Asian session. The Loonie asset struggles for a direction as the US Dollar steadies due to holiday mood in the United States economy on account of Memorial Day.

The Loonie asset witnessed an intense sell-off on Friday due to the weak US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, fell sharply to 104.70, even though investors expect that the Federal Reserve (Fed) will keep interest rates steady in the range of 5.25%-5.50% in the September meeting, too.

As per the CME FedWatch tool, traders see a little over 50% chance of a steady interest rate decision. The probability of interest rates remaining unchanged has increased from 38%, recorded last week. The odds of a stable monetary policy have increased after the release of the surprisingly strong preliminary US Purchasing Managers Index (PMI) report for May.

Meanwhile, the outlook of the Canadian Dollar is also vulnerable as weak domestic spending has increased the likelihood of a rate-cut move by the Bank of Canada (BoC) in its upcoming monetary policy on June 5,

Statistics Canada showed on Friday that monthly Retail Sales for March were down by 0.2%. The pace at which Retail Sales contracted was sharper than a decline of 0.1% recorded for the February month. This was the straight third month of contraction, exhibiting that households are struggling to bear the consequences of higher interest rates by the BoC. Weak households’ spending and consistently easing price pressures underscore the need for the BoC to return to policy normalization.