Federal Reserve Expectations Weigh on Canadian Dollar

The Canadian dollar continues to show signs of weakening momentum as the new trading week begins. The USD/CAD pair has gained nearly 0.7% over the last four trading sessions, primarily due to expectations of a more aggressive Federal Reserve and an ongoing trade dispute with little sign of resolution.

A divergence in monetary policy between the US Federal Reserve and the Bank of Canada is favoring the U.S. dollar. While markets assign over 50% chance that interest rates will rise another 0.25% to 4.25%, the Bank of Canada's next move remains uncertain, with expectations broadly split between a rate hike or an unchanged decision.

The yield differential between US and Canadian bonds continues to favor the U.S., supporting the relative attractiveness of U.S. assets. This gap could widen further if the Federal Reserve maintains a more aggressive stance than the Bank of Canada.