USD/CAD bulls remain in control ahead of the Fed

• USD/CAD remains in bullish territory leasing into the Fes this week.
• Analysts expected a smaller 25bp hike from the BoC in December.

The Canadian dollar was little changed following the Bank of Canada (BoC) Governor Tiff Macklem's comments whereby he said he expects the policy rate will need to rise further. At the time of writing, USD/CAD is trading at 1.3628 after moving within a range of 1.3622 and 1.3635.

Governor Macklem said we have yet to see a generalized decline in price pressures and that there are no easy outs to restoring price stability. Meanwhile, the Bank of Canada has already downshifted the pace of its tightening at an interest rate decision last week.

In recent data industry-level Gross Domestic Product surprised to the upside with a 0.1% MoM increase for August, slightly above the market consensus but as analysts at TD Securities explained, ''hardly scorching and Q3 GDP is still tracking in line with Bank of Canada projections (after revisions). While this report was constructive, it will not be enough to shake the Bank's conviction that the outlook has weakened, and we continue to look for a smaller 25bp hike in December.''

US dollar back and forth on Fed expectations

As for the US dollar, it fell against major currencies on Tuesday as the Federal Reserve is expected to signal a slower pace of tightening at its upcoming meeting. It is widely expected that the Fed will raise its benchmark overnight interest rate by 75 basis points (bps) to a range of 3.75% to 4.00%, the fourth such increase in a row. However, for December, the fed funds futures market has priced in a 57% probability of a 50-bps increase amid suggestions from Fed officials of a potential slowdown in the tightening pace. This is lower than roughly a 70% chance from last Friday. The US dollar index has surged more than 15% this year but it has started to print lower daily highs of late on the back of some of the speeches and interviews by Fed officials that have suggested the central bank could do smaller hikes after Wednesday's meeting.