Canadian Dollar Firms Modestly Ahead of Federal Reserve Policy Decision

The Canadian dollar edged higher against the U.S. dollar on Tuesday, with USD/CAD trading near 1.41, as markets awaited Wednesday's Federal Reserve policy decision, which several analysts have described as carrying an elevated degree of uncertainty.

Key developments

1. CME FedWatch and Kalshi data indicated a 64%–73% probability that the Federal Reserve will keep interest rates unchanged at 3.50%–3.75%.
2. Market pricing has shifted in recent sessions following movements in oil prices and geopolitical developments.
3. This meeting will not include updated economic projections (the "dot plot").
4. Federal Reserve Chair Kevin Warsh has indicated he intends to provide fewer forward policy signals than his predecessor.
5. The policy announcement is scheduled for 2:00 p.m. ET Wednesday (2:00 a.m. Thursday Singapore time), followed by the chair's press conference.

Canadian developments

The Bank of Canada, which left its policy rate unchanged at 2.25% earlier this month, is due to release meeting minutes on Wednesday. Canada's May GDP data are scheduled for release on Friday, with economists expecting monthly growth of 0.2%.

Oil market

Oil prices have eased from their mid-July highs as geopolitical tensions between the United States and Iran moderated. Given the importance of energy exports to Canada's economy, changes in oil prices may influence market expectations for inflation and the Canadian dollar.

For Southeast Asian market participants

Market participants will be watching the Federal Reserve's policy decision, accompanying statement, and Chair Kevin Warsh's remarks for additional indications regarding the outlook for U.S. monetary policy.

Sources: CME Group, Kalshi, CBS News/FactSet, Bank of Canada.