Canadian Dollar languishes near 0.8200 as Fed tightening bets buoy US Dollar

On Tuesday, the Canadian Dollar (CAD) struggled to rise above the 0.8200 mark against the US Dollar (USD), as hopes grew that the Federal Reserve (Fed) would raise interest rates during their upcoming meeting. This speculation drove up demand for the USD. Throughout the past four days, the USD/CAD pair had been on an upward trajectory.

Market attention now shifts towards the Federal Open Market Committee (FOMC) meeting which commenced on Tuesday, with analysts predicting a possible 25 basis point interest rate hike by the Fed on Wednesday. Futures markets currently reflect a 92% chance of this rate increase, according to the CME’s Fed Watch Tool. Positive economic indicators, including a robust jobs report in August and elevated inflation figures released on Tuesday, have fueled expectations of Fed tightening.

Meanwhile, the Canadian Dollar benefited from higher oil prices, with Brent Oil trading around $104.35, up 22% from late-August lows. This oil rally counterbalanced weaker Canadian economic data reported on Monday. However, Canada's main export, oil, and the Bank of Canada (BoC) are facing challenges due to softness in the Canadian economy.

The BoC may choose to hold off on interest rate hikes to bolster economic growth amidst trade tensions. The interest rates charged by financial institutions on loans and paid to savers are influenced by base lending rates set by central banks. Central banks generally aim to maintain price stability, typically targeting a core inflation rate around 2%.

If inflation falls below this target, central banks may lower base lending rates to stimulate lending and spur economic growth. Conversely, if inflation substantially exceeds 2%, central banks are likely to raise base lending rates to curb inflation. Higher interest rates generally bolster a country's currency by making it more appealing to global investors.

This trend typically exerts downward pressure on Gold's price, as it becomes an increasingly less attractive investment compared to interest-bearing assets.