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USD / CAD - Canadian Dollar trading defensively

- Loonie trading sideways ahead of Wednesdays Fed meeting and CPI data.

- Oil prices firm on Goldman Sachs forecast.

- US dollar gives up a little ground overnight, but still has a bullish bias.

USDCAD: open 1.3775, overnight range 1.3756-1.3778 close 1.3760, WTI $77.55, Gold, $2306.90.

The Canadian dollar is trading defensively due to broad-based US dollar demand and divergent Fed and Bank of Canada interest rate outlooks.

The BoC is in easing mode while the Fed is parked on the sidelines, having adopted a ”wait-and-see” stance. Markets are keenly awaiting Wednesday’s US inflation data and the FOMC monetary policy statement and upgraded forecasts.

The Fed is likely to further crush hopes for a September rate cut by telling markets it will take more time to be sure inflation is trending lower in a sustainable fashion before cutting interest rates. The dot-plot predictions will determine if the US dollar remains in demand or if it gets sold. The March dot-plot indicated there would be 3 rate cuts in 2024, but the recent mixed to strong US economic reports combined with sticky inflation readings and robust jobs data suggest the dot-plot will show only two rate cuts. That would not be good news for Canadian dollar bulls.

Aussie and Chinese equity traders returned from a long weekend and sold stocks. Australia’s ASX 200 fell 1.33% while the Hong Kong Hang Seng index declined by 1.04%. Japan’s Nikkei 225 index rose 0.25% due to the weak yen. European bourses continue to suffer from the EU Parliament election outcome and are trading deep in negative territory. The French CAC 40 index leads the pack with a 1.10% loss. S&P 500 futures are down 0.34% while the US 10-year Treasury yield is at 4.436%.

EURUSD traded negatively in a 1.0740-1.0774 range. Prices were undermined after Moody’s warned France that its stable debt rating was at risk. Comments from ECB President Christine Lagarde saying interest rates were not on a “linear declining path” provided a bit of support.

GBPUSD traded in a 1.2713 to 1.2750 band after UK employment data lowered the risk that the Bank of England would cut rates in the summer. UK unemployment rose by 138,000 jobs (3-months to April) while the jobless rate rose to 4.4% from 4.3% previously.

USDJPY drifted in a 156.96-157.46 band. Prices inched down from the peak when the 10-year US Treasury yield slipped to 4.434% from the 4.469% close on Monday.

AUDUSD climbed from 0.6592 to 0.6613 as markets reopened following a long weekend. Traders ignored NAB Business Confidence data, which turned negative in May (actual -3 vs April 2).

The US and Canadian economic calendars are empty of top-tier data.