US Rate Hike Expectations Boost USD, Weigh on Canadian Dollar

The Canadian Dollar has retreated as the US Dollar benefits from expectations of a Federal Reserve rate hike. The US Dollar Index (DXY) trades around 99.59, near its two-week high of 99.72 reached on Friday and retested on Monday.

The Bank of Canada (BoC) is expected to hold its overnight rate at 2.25% on Wednesday, marking a seventh consecutive hold. The latest Canadian data supports keeping borrowing costs steady, with underlying inflation close to the central bank's 2% target and economic activity showing signs of resilience.

In contrast, expectations of a Fed interest rate hike in September have returned following tough talk from Fed Chair Kevin Warsh on inflation, which remains above the central bank's 2% target. The CME FedWatch Tool shows around a 65% probability that the Fed will raise borrowing costs at its September 15-16 meeting.