USD/CAD approaches 1.3900 as investors turn cautious ahead of Fed policy

• USD/CAD advances toward 1.3900 amid caution ahead of Fed policy.
• Fed policymakers believe that higher US Treasury yields are slowing overall spending and investment.
• BoC Macklem said that the central bank is prepared to raise rates if necessary.

The USD/CAD pair marches swiftly towards the round-level resistance of 1.3900 in the early New York session. The Loonie asset strengthens as investors have turned cautious ahead of the interest rate decision by the Federal Reserve (Fed), which will be announced on Wednesday.

The S&P500 opened with some losses amid anxiety among investors ahead of the Fed policy. The US Dollar Index (DXY) recovers strongly after discovering buying interest near 106.00 on expectations that the Fed will advocate for keeping interest rates higher for a longer period. An unchanged interest rate decision from the Fed is widely anticipated due to higher long-term bond yields.

Fed policymakers believe that higher US Treasury yields would perform the central bank’ job of slowing spending and investment effectively. The US Bureau of Economic Analysis (BEA) reported last week that business investment contracted for the first time in the Q3 of 2023 since Covid-era as firms postponed their expansion plans to avoid higher borrowing rates.

Apart from the Fed policy, investors will keenly watch private payrolls and the ISM Manufacturing PMI data for October. As per the estimates, 150K fresh private jobs were added against 89K added in September. The Manufacturing PMI is seen steady at 49.0, below the 50.0 threshold for the 12th month in a row.

On the Canadian Dollar front, Bank of Canada (BoC) Governor Tiff Macklem emphasized on protecting Canada’s good fiscal position in his speech on Monday. Macklem further added the central continues to assess whether monetary policy is sufficiently restrictive and is ready to do whatever is required to restore price stability.