Canadian Dollar tests monthly lows against US Dollar ahead of Fed decision

The Canadian Dollar (CAD) experienced a decline against a firm US Dollar (USD) on Wednesday, setting the stage for a potential quarter rate hike by the Federal Reserve (Fed) later in the day. The USD/CAD pair climbed 1% as part of a six-day winning streak, reaching monthly highs near 1.3935. A strong US employment situation and high inflation figures have led to a hawkish reassessment of the US central bank's short-term monetary policy, boosting the greenback.

Futures markets estimate a 92% probability of a quarter-point rate increase later on Wednesday, with an 80% chance of additional hikes before the year's end. Societe Generale analysts suggest that the US Dollar's near-term direction hinges on Fed Chair Kevin Warsh's comments. If Warsh does not sound hawkish and investors begin to doubt a second hike this year, the dollar may struggle to advance further.

However, if a further hike appears likely, the dollar could gain some additional strength. Meanwhile, the Canadian Dollar has struggled to find support from high oil prices, as crude oil is Canada's primary export. Despite Brent Crude stabilizing around $104.00 per barrel, below the recent four-month high of $106.00, the loonie's performance has been limited by the uncertain Middle East situation, with regional powers becoming involved.

The Bank of Canada (BoC) is expected to maintain interest rates steady for the rest of the year, amid high inflation pressures that have sparked speculation about a possible rate hike in December. Nonetheless, the BoC is unlikely to confirm these views without improvements in trade ties with the US. The Fed deliberates on monetary policy during eight scheduled meetings per year, aiming to keep inflation at 2% and maintain full employment.

The central bank's primary tool for achieving this is by setting interest rates, influencing the value of the US Dollar (USD) in the process.