USD/CAD Hovers Above 1.3850 as Fed Cut Speculation Intensifies

The USD/CAD pair continues its three-day winning streak, hovering around 1.3870 during Asian trading hours Thursday. But I'm skeptical about further upside - the greenback looks increasingly vulnerable as traders have fully priced in a September Fed rate cut following weaker-than-expected US Producer Price Index data.

Markets aren't just expecting a rate cut - they're debating the size. A standard 25 basis point reduction is now fully baked in, but the odds for a more aggressive 50 basis point slash have jumped to nearly 12%, according to CME FedWatch. That's a big shift in sentiment that could seriously undermine USD strength.

Wednesday's PPI numbers were frankly disappointing for dollar bulls. The US Bureau of Labor Statistics reported inflation dropping to 2.6% year-on-year in August, way below the expected 3.3% and down sharply from July's reading. Monthly figures actually showed a 0.1% contraction - quite a reversal from the previous month's 0.7% increase.

Today's CPI release could be the knockout blow for USD if it aligns with expectations of 2.9% headline inflation and 3.1% core inflation. Weak consumer price data would practically cement the case for monetary easing next week, potentially sending USD/CAD tumbling despite CAD's own problems.

And make no mistake - the loonie has serious issues. Canada's unemployment rate ticked up to 7.1% in August from 6.9% in July, revealing how US tariffs are hammering hiring across key sectors. The Bank of Canada is widely expected to resume cutting rates this month, which should theoretically weaken CAD - but Fed easing might overshadow this completely.

Looking at the current market setup, I'm watching for a potential downside move in USD/CAD if today's US inflation data comes in soft. The market's already primed for monetary easing, and the recent USD strength looks increasingly unsustainable against this backdrop. Smart money is probably preparing for a reversal, regardless of what the talking heads on financial TV suggest.

Canadian Dollar Key Drivers

• BoC interest rate decisions - higher rates generally boost CAD
• Oil prices (Canada's biggest export) - currently creating headwinds at $61/barrel
• Economic indicators like unemployment (deteriorating) and GDP growth
• Trade balance data and US economic health
• Market risk sentiment - currently mixed with shutdown concerns

The next few sessions will be critical for USD/CAD direction as markets position ahead of both central banks' upcoming decisions. I'd be wary of chasing this upward move much further.